Posted by JohnBoy on July 27, 2001 at 24:42:26:
I think the repair issue can be gotten around. You took the property “as is” when purchased it, so adding in a clause where the seller has the option to take the property back you could ad in that they agree to take it back in it’s “as is” condition.
While you’re running all this by your attorney throw this at him and see what he says about it.
HR… Bill Bronchick… Gatten…CYA letters… - Posted by David Alexander
Posted by David Alexander on July 26, 2001 at 21:33:56:
Although understand I am not afraid of the DOS myself… having yet to ever have any called… knock on wood.
What about adding to the CYA letters that in the event of an economic downturn, forces beyond our control, etc, etc.
Think I’m going to add it to mine anyway.
Understand though, that I believe we have a very strong integral and moral job to solve the problem no matter what, if it’s solvable.
David Alexander
HR… Bill Bronchick… Gatten…CYA letters… - Posted by Dave T
Posted by Dave T on July 27, 2001 at 08:05:45:
Isn’t a performance mortgage designed to address the issue you raise?
If the dopey seller goes to the lender - Posted by Joe Thomas
Posted by Joe Thomas on July 27, 2001 at 05:28:53:
as happenned in at least one of these cases-why don’t you just deed the property back to the seller
HR… Bill Bronchick… Gatten…CYA letters… - Posted by JohnBoy
Posted by JohnBoy on July 26, 2001 at 21:44:15:
I think adding a clause in the purchase agreement that allows the seller some recourse to take the property back would be a good idea. That sort of puts them in the same position as any lender would have when making loans against real estate. There recourse would be against the property only and not personally against the seller.
At least this way the seller has an option of taking the property back should the buyer default on their loan. They can’t cry how you screwed them out of their house without having any rights to the property while you left them liable for the loan in their name and ruined their credit because there was nothing they could have done to protect themselves other than make the payments for a property they no longer own.
Re: If the dopey seller goes to the lender - Posted by JohnBoy
Posted by JohnBoy on July 27, 2001 at 07:52:42:
If a seller goes to the lender you may not just be able to deed the property back to the seller. What do you do with the tenant/buyer you have in the property that YOU have a contract with???
Wouldn’t it be better to add as much protection for yourself in the beginning rather than have to worry about it later IF it were to ever become a problem?
This isn’t about if a seller goes to the lender or if a lender calls a loan due.
This about having a problem that may develop where you end up with vacant properties where YOU couldn’t perform on your end of the agreement by keeping the payments current on the seller’s loan. If something happens to where the economy took a dump and you ended up with vacant properties that you couldn’t get occupied with paying tenants, there’s a possibility that some prosecutor may try to file criminal charges against you claiming you frauded the seller in some way by taking their property leaving them with NO recourse of any kind while leaving them liable for the loan.
If you took out a loan that you borrowered in your name to buy a property and later you defaulted on the payments for what ever reasons, the lender will foreclose and take the property back. You will ruin your own credit and may end up with a deficiency judgement against you, but you can’t be charged will a criminal suit because you didn’t make your payments. The lender had recourse to take the property back. It’s only a civil matter, not a criminal matter.
Now what if you went around borrowing tons of money from different people to buy a bunch of houses with. You somehow managed to get all these people to loan you money without having to give them any security as collateral. Then things went bad that was out of your control and you couldn’t pay any of these people back. Oh well, that’s life, right? Well, what if all these people starting screaming foul that you had scammed them all out of their money? Do you think it’s possible that you could face criminal charges for that? Anything is possible. It doesn’t mean it will happen, but it certainly could happen. IF it did happen, wouldn’t you want to be in a position to show that you didn’t scam anyone by showing they were secured by a written agreement that allowed them to at least get their property back since they are liable for the loan that is secured against the property?
Think about it. You get a seller to deed over their property to you where they are releasing all of their legal interest in the property over to you. You now OWN their property and no matter what ever happens they could never come back and claim any rights to the property. BUT, no matter what happens, they remain LIABLE for the loan that is secured against the property YOU now own that they have NO legal rights to?
IF something did go bad where you couldn’t perform of several mortgages you took over like this, is it POSSIBLE that this could end up all over the news where these sellers were all screaming scam where you took advantage of them by stealing their homes from them while leaving them stuck holding the bag on loans they remain liable for while YOU own their property and they have absolutely NO recourse to come back and claim any interest in the property? Do you think it is POSSIBLE that some hungry prosecutor that got wind of all this could decide to come after you and file criminal charges against you by claiming you somehow frauded these homeowners out of their homes???
WHO is more likely to look bad in this if something like this was to get blasted all over the media? The homeowner that ran into problems and could no longer afford to make their payments. Or YOU the big bad investor that has dozens of homes you own that you had acquired this way? What do you think this would look like in the eyes of the media and ever viewer watching this on TV???
Do you think the media is going tell the story the way it really is or do you think they’re going take it all out of context to dress up their story to make it look like these poor homeowners who were down on their luck were taking advantage of by this big bad investor that only had dollar signs in his eyes and didn’t give two hoots about what could happen with homeowners when you decided to stop making the payments on their loans???
Is something like this POSSIBLE to where this could happen to someone???
If this were a possibility, then would you rather go into court defending yourself where the seller was left with NO options to protect their interest on their loans in some way or would you rather be able to go into court a defend yourself by showing the sellers do have a way of protecting their interest on the loans they remained liable for?
We can all use trusts, corps and LLC’s to limit our liability all we want. That’s all great for protecting ourselfs in civil cases. But what we’re talking about here is the possibility of ever ending up with a situation where some hungry prosecutor decides to go after you filing criminal charges against you.
I’m no lawyer, but I don’t think all the trusts, corps and LLC’s would be able to shield you as an individual against criminal charges. Someone will be held responsible for those trusts, corps and LLC’s when it comes to criminal matters.
The least of my concerns is facing some civil suits to defend over this. Those corps and LLC’s can limit your liability for that. I’m concerned about adding more protection for myself to avoid any criminal matters that some prosecutor may get the big idea to go after me to set an example of.
Ooops!!! - Posted by Barbara (FL)
Posted by Barbara (FL) on July 28, 2001 at 09:02:52:
In my post below I made an error. With an assumable loan–you have the option of not taking the house back and it doesn’t effect your credit. With the “subject to” the seller does not have any options–they are liable for the loan. I would think the original seller would take the house back upon your default and be glad to because once you educated him on “subject to” he opted to sell you the house. Now your gift of education can be passed on and he could sell again “subject to” and possibly give someone who didn’t dream they could own a house the ability to do so. What a wonderful gift you gave–the gift of knowledge!! Isn’t it really the only thing we can truly possess.
Barbara (FL)
Re: HR… Bill Bronchick… Gatten…CYA letters - Posted by Barbara (FL)
Posted by Barbara (FL) on July 28, 2001 at 24:18:01:
Why wouldn’t this be done like the loans that are assumable? If you have an assumable loan and you allow someone to assume it, then they default, you get the property back as you are still liable for the loan. I’ve had assumable loans that were assumed and at closing they explain that if the buyer defaults I would then become liable again for my loan. Why are “subject to’s” handled any different than if they really were assumable as you are assuming them even though it’s not exactly what the lender wants to allow–why change all the rules even though the lenders have changed some of their rules. I think it may always be in our best interest to consider what’s good for everyone. I like your thinking, John Boy!
You sound like someone I would want to do business with if I were in trouble with a property!
Barbara (FL)
I am 100%… - Posted by David Alexander
Posted by David Alexander on July 26, 2001 at 21:53:04:
against that…
The only deal I have ever had go wrong is where a seller maintained some form of control.
They could decide that if you made a payment on the 10th instead of the 1st that there is a problem and opt to get the property back even though it doesnt effect there credit.
I think that’s an open ticket to letting them in a back door to capitalize on your work.
David Alexander
Re: I am 100%… - Posted by JohnBoy
Posted by JohnBoy on July 26, 2001 at 22:24:15:
It wouldn’t be a basic clause that just allows the seller to take the property back because he chooses to over being 10 days late.
You can have it stated where if the buyer defaults on any payments that become 30 or 60 days past due, then the seller has the option of reclaiming the property back from the buyer.
It’s not to be structured to what ever the seller may decide. The contract states what the terms will be in order to allow the seller the option.
Now if you’re worried about falling behind on the payments for more than 30 or 60 days, then I can understand your concerns…but as much as that may be a potential risk of ever happening, there should be something that offers the seller some sort of recourse against the property to prevent you from being accused of frauding them out of their property while leaving them liable for the loan against a property they have no rights to.
Evidently there was someone that has already served 16 months in federal prision over this because of taking over many loans subject to and having a number of them go into to default by not being able to make the payments. The sellers had their credit ruined over this and from what I understand the feds got him on mail fraud over this.
Now that someone has been convicted of this, I would assume this case would set a precedence for prosecutors to go after other investors that were to default on loans taking over subject to.
Personally, I feel the seller should have some sort of recourse to at least take the property back if the buyer was to default on making their payments over 30 days late.
I don’t think by just informing them that this could happen due to economic down turns or unforeseen circumstances will be enough to CYA!
The bottom line is, they are stuck with having their credit ruined or having to make payments a loan they remain liable for against a property that they have absolutely no legal rights to nor any recourse to get the property back when a buyer defaults.
Let’s just assume you did have a deal where you ran into this type of problem? If the only way you could try and resolve this problem was to offer to deed the property back to the seller if they were willing to take it back and make the payments to protect their credit and having a foreclosure show up against them…would you do it???
If you would be willing to do that then why wouldn’t you be willing to put something in the contract that gave them that option? In my opinion that would only be adding more security against yourself should this ever become a criminal matter because some hungry prosecutor was wanting to make an example out of you.
Re: I am 100%… - Posted by MoniqueUSA
Posted by MoniqueUSA on July 26, 2001 at 21:59:06:
David,
I see your point, if the recourse is loosely worded.
We ran the following language (based on JohnBoy’s draft from several months ago) by our advisors and got a thumbs up:
“At any time before Buyer pays off the existing mortgage in full, if the payments lapse for 60 days, Buyer shall have 10 days to cure said default by bringing all payments current. After written notice from the Seller, in the event Buyer fails to cure said default within 10 days, Seller shall have the option to buy the property back from Buyer for the sum of $1. Buyer shall agree to sell the property back to Seller for $1. Buyer and Seller shall have no further recourse against either party.”
Something to consider.
MoniqueUSA
Re: I am 100%… - Posted by Douglas
Posted by Douglas on July 27, 2001 at 08:53:28:
Hi Johnboy:
Your postings are appreciated. Was wondering about that criminal case you referred to. Someone doing 16 months time on subject to fraud. Would it be possible to gain access to this case??..Thank you, Douglas
I am putting this post up as… - Posted by David Alexander
Posted by David Alexander on July 26, 2001 at 22:35:17:
sorta a devils advocate to HR.
Who says that folks are never told of the risks by the gurus.
I am not saying a CYA would cover the risk, but might mitigate a seller from trying to file a suit…
Just thoughts nothing else…
David Alexander
Unless… - Posted by David Alexander
Posted by David Alexander on July 26, 2001 at 22:11:13:
You have money invested into the property…
You have already sold the property to another party or given the option to buy.
Nope, don’t want them involved… if they want completely out I’m their guy…
Maybe put something into the CYA that even says
"I understand that I have done this and understand all risks including at very worst a possible foreclosure, which I am currently already facing… yada, yada…
Of course that wouldnt work on non preforeclosure property… but it would a help on alot of property.
David Alexander
Re: I am 100%… - Posted by JohnBoy
Posted by JohnBoy on July 27, 2001 at 09:39:47:
I have no idea who the person was or even where the case was tried. It was only mentioned here in a previous post and they respect that person’s privacy. If I knew who it was I would have to do the same myself. I would let the person involved make the choice of making this public if they so choosed to do so.
But from what I do understand they didn’t get him on subject to fraud, it was somehow linked to getting him on mail fraud. Seems to be the popular thing the feds use to go after a lot of different cases when then can’t get them on what ever it is they actually do. They use loopholes in the law to get them on mail fraud somehow.
If the feds want you, they find a way to get you on something if they can’t get you directly on what ever it is you were doing.
So that would be another issue I would like to look into to see if the mail fraud thing can be avoided also.
At this point without knowing any details I’m assuming it may have had something to do with mail crossing state lines where these lenders were located in different states where any mail was sent to them regarding the loans. But that’s just an assumption on my part. I don’t know what the actual accusations were pertaining to anything being mail fraud.
Re: I am putting this post up as… - Posted by JohnBoy
Posted by JohnBoy on July 26, 2001 at 22:47:49:
Oh No! Now you’ve done it! HR is going to be all over this thing! LOL
I would include the disclosures in the CYA letter along with a clause in the contract giving the seller some sort of recourse against the property.
The clause in the contract should be enough without any disclosures in the CYA letter, but I doubt the CYA letter alone would be enough. In fact, it could possibly even work against you! It’s like YOU were aware of this risk and even knowingly being aware of it, you still left the seller hung out to dry with no recourse against the property while leaving him on the hook for the mortgage and ruining his credit!
Just another view point from what a hungry prosecutor may try to argue!
OK, where are the attorneys here??? Can we have some input on this issue?
Re: Unless… - Posted by JohnBoy
Posted by JohnBoy on July 26, 2001 at 22:31:25:
I don’t think you will be covered by just informing them of any risks by using a CYA letter.
As far as having a buyer in the property and needing to protect their interest goes…Um…David, you wouldn’t need to worry about anything if you had a buyer in the property making the payments!!!
Unless of course you were using that money for other things other than making your payments on the seller’s loan! Then you’re guilty of rent skimming!
Think about it? When would you need to worry about having a problem with making the payments late past 30 or 60 days??? WHEN YOU HAVE A VACANT PROPERTY! So WHAT buyer or tenant are you going to need to protect???
If this were a perfect world… - Posted by David Alexander
Posted by David Alexander on July 26, 2001 at 22:57:21:
you wouldnt have to worry making payments…
What about when the buyers/tenants are behind… properties go vacant…
But the fact is when you alot of these loans in place, or even just a few that have very monstrous payments that folks get behind on then it takes more money to grease the machine.
ie… you have a 100 loans at say 80% LTV all wwith 100k notes payable… at 1,000 a month. Your underlying payments are 800/month times 100… your incoming 1,000 a month times a 100…
That’s 80k going out and 100k coming in… but if 20 loans are not paying perfectly… some a little late or in some sort of varying state… vacant etc, or maybe your buying more property, and so maybe your carrying properties too…
Fact is it is a BIG Wheel to grease.
Rent skimming is not what happens… you get introduced to cashflow management in a Big Way.
If you added an economic downturn or any sort to that you had better be careful.
I think that is what HR was trying to point out…
Is that folks like you and I, make it sound so simple “which it is”… Why, propbably because we have fundamental business sense.
Not all folks coming in to this do, it maybe their first business or first time investing.
I have heard from both kind of folks that are wealthy, some are very conservative and pluck at it single mindedly, doing no leveraging but turning their money over dilignetly… others, grasp every ounce of leverage and hang on for deal life until they got there.
It all depends on personality, tolerance, willingness to grow, and business acumen.
I know the guy that HR talks about and respect him very much… to think of being able to buy as many houses as he was able to… Incredible.
I think alot of all this has to do with timing, maybe some foresight… lots of planning
But, I’m here to tell you… You never know from what direction you will get attacked… no matter how much planning, foresight or good timing.
For me, I still say I wouldnt buy deals where the sellers retain any control… that may be a position of where I’m at or lack of… because of course I dont know what I dont know…
But am continually growing and learning.
David Alexander
Re: If this were a perfect world… - Posted by JohnBoy
Posted by JohnBoy on July 26, 2001 at 23:33:45:
I don’t see this where the seller would have any control. As long as you are performing on your end and making the payments within the 30 or 60 days allowed in your contract, the seller has no control of anything. It’s only IF you don’t perform on your end and fall behind on payments beyond the grace period allowed in your contract that would allow the seller to step in and protect his/her liability they have on the loan.
As far as having many properties with a big wheel to crease, so what. Each deal should be able to stand on it’s own. If one deal goes bad you cover it with your reserves put away. If you have to, you may end up using your cash flow. If the cash flow gets eaten up because of to many deals going south, you don’t rob paul to pay peter to where you end up with bigger problems with more properties falling behind. You take care of the deals that do have tenants paying on them first.
If you have allowed recourse for the seller to take the property back, you have an out if it was the only way left to deal with it.
Without the recourse clause you only have the option of offering the property back to the seller. The seller says no. You can’t solve the problem. You default on the loan. The seller’s credit is being ruined. Then end up with a foreclosure against them. They cry foul because you screwed them out of their property and left them hung out to dry leaving them liable for the mortgage. You argue, but I offered to give them the property back and they said they didn’t want it! To bad! That wasn’t part of the contract. YOU agreed to make the payments. You didn’t. You sleeze ball you! You srewed these people out of their home, failed to make their payments that you promised to do, left them liable on the loan, they now have a foreclosure against them for a property they no longer owned, and you want to just sit there and say, sorry, but sh*t happens and I can’t control the economy???
Enter the recourse clause. You default. The seller has the OPTION of taking back the property. Whether they do or don’t doesn’t matter. What matters is that they DO have the option to take the property back which IS part of the contract agreement. THey can’t cry foul that you screwed them by leaving them liable on a loan against a property they no longer own. They HAVE some recourse to protect themself! The contract clearly shows they have an option to protect their interest on the loan by being able to take the property back IF they choose to.
It would be harder to agrue you took advantage of someone and/or tried to screw them or left them hung out to dry if they have some sort of recourse. Now agrue your defense if you gave the seller NO recourse of any kind!
In my opinion it’s better to have more protection for yourself than to leave yourself open for potential problems when you don’t have to.
I really don’t see where giving a seller the option of taking the property back could hurt the investor. In my opinion it only helps to add protection for the investor.
Re: If this were a perfect world… - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on July 27, 2001 at 20:57:54:
I’m going to say “you” throughout, but please keep in mind I mean “an investor”, not you personally.
I always give sellers the performance mortgage. I really don’t see why not. Howevever, I don’t follow your logic. Just because you added the performance mortgage or another way for sellers to take the property back in case you failed to make timely payments - the same line of reasoning (“you screwed me up”) will still apply.
I certainly see how you me, and any other investors would like to make the case that seller’s position is now a more secured one, but I don’t believe it really changes anything. As you mentioned in another post within this thread, they weren’t in the position to manage the payments when they sold the house to you. Nothing tells me they’ll be in a better position to do it now. Certainly not when they might be living out of area, or, even more so, in the time of economic downturn.
They’ll still cry a foul play absolutely the same way you painted. If you read what you wrote above for the first case scenario, the same things will still apply. The fact you’ve given them the option to get it back doesn’t really make any difference. You made some promises, they trusted you, you didn’t perform for whatever reason - they have the same case.
If you found a way to contractually obligate them to take it back upon certain conditions - that may change something. However, I don’t believe this position will buy too many houses. If you found a way to control your liability by shortening the term of your commitment, like in a short term L/O renewable for many more short terms, that would also offer some protection. I am not sure how to do this with Subject-to. This, however, could easily be done with wrap around owner financing from seller.
I am thinking, just like everybody else.