Posted by TRandle on July 28, 2001 at 17:33:57:
Stacy,
Thanks for the input.
JohnBoy, Monique, others…another wrinkle - Posted by TRandle
Posted by TRandle on July 27, 2001 at 19:54:22:
So, I agree with the idea of seller recourse on Sub2 for their protection as well as my own. In fact, I had already done that per a request from a seller prior to these discussions, but I plan to incorporate some provision formally into my contracts.
My question is this:
I’m unable to keep up with the payments on all my Sub2’s (I know you have vivid imaginations, so create your own sob story for the circumstances). My properties have substantial equity build-up yet I can’t find financing for whatever reason. I don’t want to give up all of the 50k etc. in equity on each property that I’ve created.
So, realistically, I realize there would probably be other solutions if there was substantial equity, but don’t we want a clause protecting our monetary interests as well? I don’t think a couple of late payments (which disappear of the credit report fairly quickly) equates to a return of the property for a buck.
Perhaps we give a 50% interest back? If things continued to get ugly, we could then be more flexible and turn over everything.
Perhaps a graduated buyback schedule? In other words, if default happens in the first 3 years, X amount, 5 years, Y amount, etc.?
On the particular one I referenced above, I paid the seller 6k for the deed. My “give-back” provision required the seller to agree to record a 6k lien in my favor against the property. That way they wouldn’t need immediate cash to utilize the provision and I could get my funds returned at some point.
Your thoughts, please? Thanks…
OOPS! I UNDERSTAND NOW! - Posted by TRandle
Posted by TRandle on July 29, 2001 at 09:36:53:
I just re-read my post. I now realize it wasn’t clear that the “situation” was supposed to be a hypothetical, down-the-road type thing.
I was wondering why everyone was giving specific advice to me, instead of answering the broader questions I thought I had asked.
I’M NOT HAVING ANY PROBLEMS MAKING MY PAYMENTS! I WASN’T ASKING THOSE QUESTIONS FOR ME PERSONALLY!
I apologize for not being clear. Please put the word “Suppose” in front of the “I’m unable to keep up with the payments” etc.
and where are the attorneys? - Posted by Dee-Texas
Posted by Dee-Texas on July 28, 2001 at 18:58:22:
Let’s hear from Someone that knows.
Dee-Texas
Re: JohnBoy, Monique, others…another wrinkle - Posted by JohnBoy
Posted by JohnBoy on July 28, 2001 at 17:06:09:
This topic could make a GREAT round table debate at the next convention! Then we could drag the attornys in on it! 
Re: JohnBoy, Monique, others…another wrinkle - Posted by MoniqueUSA
Posted by MoniqueUSA on July 28, 2001 at 15:24:29:
Tim,
You’ve gotten lots of veteran feedback already. I’ll simply add two quick thoughts:
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If a property has substantial equity (your $50K example) and one is unable to obtain financing to pull the cash out, the troubled investor should seek out “help” from a financial friend. Someone who could make a loan just large enough to cover the payments for a while – collateralized by the property. Any of your colleagues that are note buyers (i.e., investors that typically have access to cash) might be willing to do this for a friend, particularly with so much equity involved.
-
In a last ditch effort … and you’re really in a bind with no one with the funds to bail you out, you could have an investor friend record a mortgage against the property up to the amount of equity that you have in the deal (or something less if you believe circumstances with the seller warrant it). If the seller exercises their option to get the house back, it would be subject to all existing mortgages. Once the seller sold the property, the amount owed in the note (the equity at the time of your default) would be paid to your investor friend.
I’m just thinking out loud here.
MoniqueUSA
Re: JohnBoy, Monique, others…another wrinkle - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on July 27, 2001 at 22:00:01:
Tim,
forget about all that protection stuff. Just call me with your $50K equity deals
How the Pactrust handles it. - Posted by Bud Branstetter
Posted by Bud Branstetter on July 27, 2001 at 21:46:53:
If a resident beneficiary defaults there is a provision for a monetary penalty and interest on the amount owed. They then are notified that they are in default of the terms of the Land trust beneficiary agreement and the default is constructive notice to sell their share to the other beneficiaries. They have 30 days in which to contest the value of the offer by getting an MAI appraisal. If they do and the appraisal validates the value they are given an unsecrured promissory note for the amount after deducting penalties interest and what is owed. Because the have also violated the lease by not paying they have probably been evicted by this time.
The investor is in the same position if the RB defaults and they do not make up the payments after exhausting the contingency fund. The original owner called non resident beneficiary would have the right to make up payments and buy out the equity the investor has. The investor would get the promissory note for his adjusted equity.
I’m sure JohnBoy and others are going to try and reinvent the wheel. Why buy GOODYEAR’s if the tread comes off under heat. Mine just runs smoother buy using what is already out there.
How the Pactrust handles it. - Posted by Bud Branstetter
Posted by Bud Branstetter on July 27, 2001 at 21:45:18:
If a resident beneficiary defaults there is a provision for a monetary penalty and interest on the amount owed. They then are notified that they are in default of the terms of the Land trust beneficiary agreement and the default is constructive notice to sell their share to the other beneficiaries. They have 30 days in which to contest the value of the offer by getting an MAI appraisal. If they do and the appraisal validates the value they are given an unsecrured promissory note for the amount after deducting penalties interest and what is owed. Because the have also violated the lease by not paying they have probably been evicted by this time.
The investor is in the same position if the RB defaults and they do not make up the payments after exhausting the contingency fund. The original owner called non resident beneficiary would have the right to make up payments and buy out the equity the investor has. The investor would get the promissory note for his adjusted equity.
I’m sure JohnBoy and others are going to try and reinvent the wheel. Mine just runs smoother buy using what is already out there.
Re: JohnBoy, Monique, others…another wrinkle - Posted by Jack
Posted by Jack on July 27, 2001 at 21:44:57:
I don’t think a subject to seller would like the potential return of the property…EVER.
The fact that you give him a method of saving himself with a note (if needed) is good enough. You might be shooting yourself in the foot otherwise.
The practical side is that if the properties had substantial equity then that would indicate the values had risen and there would, economically, be no reason to not be able to cash flow the property.
The problems come in when there is negative equity and as a result … negative cash flow.
I don’t think that you have to worry about the scenario you describe.
Jack
Re: JohnBoy, Monique, others…another wrinkle - Posted by Bud Branstetter
Posted by Bud Branstetter on July 28, 2001 at 20:23:38:
Remember anything recorded does put on public display a notice of other ownership. Putting a mortgage on the property could cause a problem if not disclosed that it could be done or is being done. The nice things about land trusts is that they are personal property. A UCC filing would record a lien against your interest in that trust. While it is now public I doubt a lender is smart enough to check. Heck, they are not smart enough to check for the real property records for much of anything. Who is going to decide what the investors equity is? At the time you buy does the seller get to know that he sold below market.
thanks… - Posted by TRandle
Posted by TRandle on July 28, 2001 at 17:36:39:
Monique,
Thanks for the ideas.
it’ll be a while - Posted by TRandle
Posted by TRandle on July 28, 2001 at 24:58:14:
AG,
I’ve protected myself so well with those 50k equity deals that I’ve yet to have one actually stick around long enough to close. It’s getting to be like fishing stories and the “one that got away”. LOL!
I won’t forget you, my friend. Yep, once I’m happily divorced (kidding for those that don’t know me), doing my infomercials on the back of an enormous speedboat with Hawaiian Tropic babes dripping all over me, I’ll throw you some 50k crumbs.
Ummm, what do you mean it’s…your boat? Oh, yes, I see, it does say SUPERCHARGE on the side, doesn’t it? My mistake, time for some sleep…
Re: How the Pactrust handles it. - Posted by JohnBoy
Posted by JohnBoy on July 28, 2001 at 01:50:37:
My point isn’t to try and reinvent the wheel. My point is that there are a lot of people there doing subject to deals that provide the seller with no recourse of any kind against the property they are left with being liable for a loan secured against that property.
There could be potential criminal charges filed against an investor if something was to happen where they defaulted on a bunch of sellers loans.
My point is that if you are going to do subject to deals, then protect yourself as much as you can to prevent any chances of being charged with some criminal matter IF something did go wrong.
Many investors still find the PACTrust hard to fully comprehend and they understand taking over a loan subject to better. It’s easier for them right now because they don’t fully understand the PACTrust. So if you’re going to do subject to deals, at least add as much protection for yourself as possible.
I don’t see that as trying to reinvent the wheel. I see it as just trying to CYA as much as you can doing this type of deal.
Re: How the Pactrust handles it. - Posted by TRandle
Posted by TRandle on July 28, 2001 at 24:45:09:
Bud,
I guess I’m just going to have to sit down with the various docs and study them until I understand them fully. I think at this point, I’m familiar with most of the general concepts, but I’m definitely hazy on the minutia. For instance, I hadn’t thought about the NRB buying out the equity if both the RB and IB defaulted and didn’t purchase. Thanks.
maybe you’re correct… - Posted by TRandle
Posted by TRandle on July 28, 2001 at 24:39:13:
I tried to think of an exaggerated example to illustrate my point and I can’t. LOL!
However, at this point, I don’t want to record a mirror wrap (I did one of my first deals that way) and I do like the idea of providing seller recourse, within reason. I have no idea whether or not the seller would want the property back since I haven’t been in that situation. I agree it’s not probable.
However, with the ebbs and flows I’ve seen in the short time I’ve been doing this (especially since quitting my job), it’s not at all difficult to imagine being strapped for cash. Just take on a few too many projects at once (as Alex pointed out), sprinkle in an eviction, tenant layoff or two, and stir in a few other miscellaneous mishaps, and boom, you’ve missed a couple of payments.
I follow the foreclosures and not too long ago, there were several properties titled in land trusts going to sale the same month. I assume they were all due to the same individual or company defaulting on payments, but I don’t know that for sure. Newbie, sophomore or seasoned, it can’t be that difficult to get overextended, and without appropriate contingency plans, you’re in a pickle.
You find private funds or some other solution in month three. Market has steadily climbed and seller demands house back for a $1. No thank you.
If everything’s going down the tubes and there’s no stopping it, then much of this thread is moot. However, I can easily see a short-term monetary crisis wiping out much of the work I’ve done to date, if I were to include some arbitrary $1 clause.
So, my point/question, regardless of far-fetchedness, remains. Remember, I’m an analytic and like to examine possibilities?
So, until I become more familiar with all the docs in the PT and verify it has the answers I need (sorry, Bill, Jim, and Bud), I still like JohnBoy’s clause, but I’m looking for some modification that would allow me to retain some of what I’ve worked to build.
Yes, I heard your solution and Bud’s and I am not arguing those points. I also realize I’m on JohnBoy’s “reinvent the wheel” train, but I’ve purchased a round-trip ticket and I’m not ready to exit yet.
Does that make any more sense than when first asked? I guess I’m just hunting for a simple clause that I can incorporate right now that will provide me slightly more protection. Perhaps I will move toward the PT or toward some of your solutions, but those require much more exploration, thought and understanding than I want to do now.
Thanks.
in theory, you are correct - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on July 27, 2001 at 21:58:33:
there shouldn’t be logically a reason to bail out during the good times. However, cash flow management is a serious issue when you are running a large number of projects.
About 2 months ago I got a call from an investor who was in the middle of about 12 different projects, with a few uncompleted rehabs, several deals listed for sale and several homes under contract to buy - all without cash necessary to swing them.
I am quoting the e-mail I got:
"let me know if you are interested in helping me with any of these. Holding is kickin’ my butt!
I’m open to just about anything these days.
I’m cash poor right now with too many houses.
Let me know if you can help."
This kind of stuff can happen in the best of times too.
Re: JohnBoy, Monique, others…another wrinkle - Posted by Alex Gurevich, TX
Posted by Alex Gurevich, TX on July 30, 2001 at 14:43:55:
Bud,
I don’t see why you believe recording a lien without a disclosure to seller could create a problem. Creating a lien is something derived out of one’s property ownership rights, specifically holding a title to the property. My understanding of the contract law is anything that’s not expressly prohibited is allowed. Therefore, unless there were prohibitions in the investor’s agreement with the seller or the docs of the loan taken over via subject-to I don’t see how you could go wrong with it.
Disclosure to sellers about future mortgages - Posted by MoniqueUSA
Posted by MoniqueUSA on July 29, 2001 at 17:29:10:
Bud,
Until I think about it more, I don’t see a problem with recording a mortgage that publicly displays a lien on the property.
Presumably, the Seller got the agreed upon equity out of the property at the time of closing. If they didn’t, then they have a lien against the property for the balance of what is owed – and then their rights as a junior lienholder are clear … they can foreclose if we don’t perform on the senior mortgage that we took Subject To.
Good question about disclosing to a Subject To Seller that a mortgage can be put on the property … It drives a bigger question. Should an investor define for the Seller all of the rights in the bundle of ownership that they give up and that we get when buying their property?
My gut reaction is no. But perhaps the answer should be “Maybe.” For instance, our CYA letter makes it clear to the Seller that they can no longer take a tax deduction for mortgage interest, property taxes, etc. after the date of the sale. Here, we make it clear they give up this right and that we get it when they sell their property.
Hmmm…You’ve got me thinking.
MoniqueUSA
Amen to Johnboy… - Posted by Kash
Posted by Kash on July 28, 2001 at 13:40:18:
I’m glad someone is saying what you are. Some would have us believe PacTrust can do almost anything, that it makes pre-historic most everything else, and, of all things…they say it is simple. Try explaining that to most average buyers and sellers.