All Forum Posts by: Ed W.

@Michael P.

"If sub2 is fraud why is it on the HUD-1? (honest question)"

I am not an attorney but here is an educated guess based on fact - you can always purchase subject to debt with a lender's permission and it would need to be on the HUD for that reason. Of course, all of my sub to deals had the seller's debt placed there. That said, I'm still firmly in the camp that sub to does not constitute fraud but I've left open the possibility that I'm incorrect.

@Rashid Khalil               @James Wise                @Jay Hinrichs

Rashid, you asked for more information related to the insurance arrangement I had for the sub to deals. First, the context - this is a condensed version to give you the general idea. At any one time, I would typically have 5 to no more than 10 SF houses purchased via sub to in my portfolio. Up until a few years ago, you could purchase a nice 2,000 sq ft house in a good school system for about $100/sf in the Columbus Metro market. They are typically double that or more today. So my sub-to's generally had ARV's in the $50k - $250k range. On rare occasions, higher. I have never paid more than the 70% of ARV minus repairs on any property except when there was something that offset the higher percentage (perhaps a lien on a second property, or a very good price on a second property or package of properties, etc.). All of my deals have made good financial sense and out of the hundreds I've purchased/controlled, I've lost very modest sums on only 2 (total loss for the 2 less than $10k). Part of my success had to do with the care I took to value properties. I can't speak to anywhere but where I've purchased but there are a lot of bad surprises that come from arriving at valuations based solely on 3 comps and considering nothing else (no, I won't take the time explain my process but look up the appraisal expression "adverse conditions" as a way to get started in the right direction).

So, insurance to keep the sellers of sub to properties needed to be $1.5 million. It actually could have been less considering that I almost always had properties across the entire range of $50k - $250k ARV (not what I paid for them) and none of the properties had debt that exceeded 70% of ARV (or had some compensating factor that allowed the sub to house to have more debt than 70%).

The policy was term life.  As I originally stated, a trust controlled by a bank had a regularly updated list of the pertinent properties and the instructions I originally outlined above.  Either the seller's debt would be paid in full from the insurance proceeds or, if that amount was insufficient, the instructions were to make monthly payments until the properties could be sold.  The sellers were never left naked.  The trust was between my corporation and the bank and, of course, on my death the net of the corporate assets after liquidation would go to my heirs including whatever insurance proceeds remained after satisfying the sub to obligations. 

Rashid, I've given you a reasonable level of detail to answer your question.  Please do me the courtesy of answering mine: "In the meantime, it will be worth your time to consider the reservations of 3 very experienced investors (Jay, James, and me) and suggest how you believe you can accomplish your goal."

@Jay Hinrichs

@James Wise

Jay, we all have lives outside of BP so I haven't yet heard from James with the information I requested from him regarding his belief that subject to somehow how falls under the category of fraud.  We all agree that it is a potentially dangerous procedure but, in your experience, have you run across any indication that it is considered fraud under any particular laws?

@Rashid Khalil

@Jay Hinrichs

@James Wise

Rashid, I've been in New York for the past 4 or 5 days and have to leave very shortly to head back to Ohio.  I'll have the time to respond either this evening or tomorrow.  In the meantime, it will be worth your time to consider the reservations of 3 very experienced investors (Jay, James, and me) and suggest how you believe you can accomplish your goal.  What are your credentials for doing a subject to deal?  The good news is that you seem to have the financial ability to protect the seller and a much better reason to use subject to than most newbies but, beyond that, what knowledge do you have to do this well?  

@James Wise

@Jay Hinrichs

I'm mostly retired but if someone brings me a deal I don't throw it away.  I do no marketing.  Jay, I'm certain I don't have your depth of knowledge and experience. The few posts of yours that I've read, have been very helpful to users of this site. 

James, I'm not sure where I fit relative to you but I'm competent within the areas of real estate that I chose to pursue. That said, I accept that you have a ton of experience and very likely are a very competent guy.  In reply to my request for something that would explain to me why sub to is considered fraud (a term under the law with a very specific definition within each state) you replied with "You've never heard of a due on sale clause that's in basically every mortgage?".  I am very familiar with those clauses and have been for over 30 years.  However, telling me that does not help me confirm your assertion.  Please, just tell me where I can find the information, if it's true I'll change my thinking and my actions immediately and others on this site will benefit as well.  

To both of you, there is no question that newbies aren't remotely competent to deal with sub to deals - too many moving parts and most attorneys don't know what is needed. As I stated above, I chose the approach I took with the OP to create a discussion that would likely lead to some valid and helpful conclusions.  I didn't want a theoretical discussion, I wanted one based on actual facts.  It makes it much more real for, in this case, the newbie.

I want share with you both that I'm very familiar with the damage failing to perform within a sub to deal can inflict on a seller.  Around the time of the crash (I can't remember the exact dates but in or before 2008) I was jealous of a competitor.  I know that's a terrible emotion to have but it was galling to me that he was closing at least 5 times the number of properties than I was closing and I could not understand why that was.  I knew he was a better marketer than I - but not that much better.  Bottom line, at least 20 of his sub to deals ended up in foreclosure seriously harming the sellers who placed their trust and financial lives with the man and he also harmed other investors who were acting responsibly by tainting the profession. Both of you know the many bad consequences those sellers endured.  Why did that happen?  The deals were not economic, did not have the margins and cushions that investors need.  How did he do so much more business than I did?  He did deals I would not have even remotely considered doing. They were awful investments. The result, he caused a financial train wreck.

The following is not meant to pat myself on the back but to at least suggest to you there are some ways to do sub to deals that greatly minimize (but admittedly not eliminate) the risks to sellers.  The following were standard practice for me:

I had an office and a secretary.  Her subject to duties (duties I strongly emphasized to her that they must be followed by having her sign a document stressing their importance) included paying the mortgages at least 2 weeks early and then following up no later than the due date to confirm the payments had posted.  We had one instance - my fault - where 2 checks (yes checks, it was that long ago) for 2 different lenders were sent to one lender and, of course, those are machine processed and the wrong bank name on the check was no impediment to the wrong lender depositing it. So, the account that was overpaid ended up with an extra payment of principal and the other account was credited with zero.  When she did her due diligence she found that deficiency, we figured out the problem and immediately sent the check.  Yes, it was posted by the bank after the first of the month but it was posted before the late payment was due (i.e., prior to the 15th) and never got remotely close to being over 30 days late.  No harm was caused to the seller.  

The following is in broad strokes with some details not mentioned.  When people place their trust in me, I work very diligently to not worry them or disappoint them.  One of the protections I gave the subject to sellers was to put in place a substantial life insurance policy.  The beneficiary of that policy was trust held by a bank.  Long story short, if I croaked one of two things would happen.  The existing sub to notes would be paid in full OR if there were insufficient funds to do that, monthly payments on all of those accounts and would be made until my attorney disposed of the properties.

BTW, I've also done a lot seller financed deals.  I know that even if they agree to accept payments over time, they are still anxious.  I went to every closing of a property sold with seller financing with a check in my hand.  At the end of the closing, I gave the seller that check explaining that it was the first monthly payment.  That gesture almost always relaxed the seller and the apprehension largely disappeared.

@James Wise At a minimum, sub to deals require knowledge, highly ethical behavior, and an ability to perform.  

I'm a person who believes in being honest and lawful and I believe my actions over many years strongly suggest that I have accomplished that goal.

I've never heard of a law - or anything else for the matter - that suggests that sub to's are illegal or in some way creating a fraud. I realize that real estate laws vary widely among the 50 states but could you please cite your source for them being fraudulent.  Since we are both Ohio guys, a cite from the Ohio Revised Code would be helpful   What you're aware of may or may not apply to me.

You and I know that the OP probably doesn't have the credentials to do his transactions but I don't like to make assumptions.  I'm sure you understand the reasons for the questions I asked.  There are many, many problems - some of them potentially very hurtful and harmful to the seller - when handled in incorrectly whether by lack of knowledge, lack of ethics, lack of money or other avoidable deficiencies.  This thread has the potential to help newbies and experienced investors who almost certainly do not have sound (or any) understanding of the knowledge required, the necessary precautions and care that sub to deals require.  

@Rashid Khalil Thank you for your candor.

Given your lack of experience (and even if you had some experience) getting professional assistance is critical.  AFTER you close on the property(ies), what is your plan?  Fix and flip, hold for rental, or ????    

After you purchase the property, pay for closing fees and general costs of purchase, pay for your attorney, fix/upgrade the properties if needed, market for your sale or tenant, pay for holding costs till you reach your goal of sale or lease, and miscellaneous expenses, how much in CASH (not credit) reserves will you have if the property has surprises (it likely will).  After all the initial costs, how in CASH reserves will you have to pay the seller's mortgage, taxes, and insurance?

How did you find the properties?  Are you negotiating price and terms or is an agent or other third party?  

I'll be unavailable until later today to reply.

@Rashid Khalil@Rashid Khalil@Rashid Khalil  For folks on this site to really provide you with quality assistance, it would be helpful if you are more specific.

Is this "1st investment property" your first ever or have you done many investment properties elsewhere and this is just the first in Columbus?  Have you done any sub to deals?  If so, how many and with what level of success?

What do you mean by "sub to service"?

@Cole Puterbaugh  You are welcome.  However, part of what I was trying to convey was that there are a lot more tires than you will recognize as worth kicking or even see.  Granted, BP has a wealth of information that will help you avoid many mistakes that you would make without that information but until you have experience you won't have it all in proper context and, for one reason or another, you will not use it properly or understand it fully.  That's true of all complex undertakings.

I've not heard of Norada.  They may be the best on the planet for all I know - or not.  Ignore the following at your peril - have their management contract reviewed by an attorney.  Some of them have very expensive or potentially expensive "traps" - language that you may not fully understand the consequence of.

@Cole Puterbaugh I will add one additional but very important point.  In real estate, as well as in other investments, if you find yourself hoping you made the right decision, you've invested unwisely (it may turn out ok or even great but you've been unwise and relied on luck instead of almost certainty).  Invest in a way that demonstrates that, even if the investments weren't entirely what you hoped for, you can sell the properties without losing a nickel even after all of the costs of sale.