Structuring 1st "Subject to" Deal.. - Posted by Fran CA

Posted by Mike Schmidt (IL) on July 25, 2001 at 13:24:01:

NP Bill, I was just worried I was leaving money on the table and you knew something I missed =)

Structuring 1st “Subject to” Deal… - Posted by Fran CA

Posted by Fran CA on July 24, 2001 at 10:28:02:

First I would like to say thank you to everyone at this site for all the help and support. I wouldn’t be asking these questions if I could get into search the archives (Terry the other searches look great!), but here goes…

I have a motivated seller that needs to be out in 30 days. They are leaving the country. I want to take the house subject to their existing loan and get the deed. Since I have not done a subject to deal before, what would be all the documents that I would need?

They have their home listed with a realtor, but said that they will pay his charges. Before we sign anything should I get them to release their contract with the realtor?

They originally said that they need 10K to let us take over the payments on a L/O, since they have about 60K of equity (FMV 455K - Owe 395K) should I offer them 5K to get the deed? I don’t have 5 or 10K laying around, how would I pay they that if they decide to do the deal?? When would I have to give them the money?

With them leaving the country how would I be able to close on this in 3 years? They plan to come back eventually, but they are not sure when.

One last thing, they have a second mortgage with a high interest rate. They offered to refinance the second to get the payments a bit lower. Something they were in the process of before they put it on the market. Should I ask them to do this if we sign?

If there is anything that I am missing, please let me know. I don’t want to make any mistakes on this deal as the monthly payments on this house are quite high.

Thank you,


A PACTrust answer - Posted by Bill Gatten

Posted by Bill Gatten on July 24, 2001 at 14:40:33:


Just so that you know about the “other white meat,” let me offer this.

Suggest that the owners not sell at all. Instead have them cancel their listing and just lease the property to you on a triple net lease arrangement (whereby you cover all maintenance, payments and insurance). You then have them put the property into a land trust in their own names. Next you have them make you a beneficiary in their land trust for a 90% interest, with an agreement that they will relinquish their 10% to you in 3 years: at which point you agree to either sell the property or refinance it in your own name and retire their loan and return any equity they may have been carrying.

By using this process you have not effected a sale per se: you, therefore have saved them a Realtors commission, income tax on their capital gain and any worries about the subject-to owner financing. And you probably can get the 2nd mortgage holder to greatly discount its payments and principal (if there is much equity in the property).

The property is now protected against liens, suits, judgments, creditor claims, tax liens etc. that could attach to the property. And, too, with the PACTrust there is no Due-on-Sale violation and the least chance (re. any other creative financing method) of a lender claiming that their security interest has been breached or compromised by the process (after vesting with the trustee in an authorized Inter-Vivos trust, all other documentation is secret, private, anonymous and wholly unrecorded).

Bill Gatten

Re: Structuring 1st “Subject to” Deal… - Posted by .

Posted by . on July 24, 2001 at 11:18:50:

Hi Fran,

First off, what do you plan to do with the house, are you going to live in it yourself, lease option it out or what? You always want your buy and sell strategy to compliment one another and if for some reason if you can’t hold the deal together make sure that you have an easy way out. In most areas of the country there aren’t a lot of tenant/buyers willing or able to make a $3,500 or more a month payment on a 445K home.

Before you move forward on this deal do you have or are you sure you can get someone in the property?

Re: A PACTrust answer - Posted by Fran CA

Posted by Fran CA on July 24, 2001 at 15:08:31:


PACTrust was one of the ways I thought about structuring this deal, but I don’t feel confident enough to talk to the people about it. How would I approach them with a PACTrust? What forms would I use? Would I use the same forms for doing a subject to deal? I was planning on using an Agreement to purchase and then putting into a land trust naming me the beneficiary. Is there something else that the PACTrust would do that those documents wouldn’t?

Thank you,

Re: A PACTrust answer - Posted by Mike Schmidt (IL)

Posted by Mike Schmidt (IL) on July 24, 2001 at 14:48:36:

Why would a 2nd mortgage holder discount their loan if its current? Or did I miss the part where it was behind??

Strategy - Posted by Fran CA

Posted by Fran CA on July 24, 2001 at 11:26:04:

To answer your questions, 455K is the median price range on homes in the area. So most people will have to pay at least $3500/mo if not more. I think that with offer seller financing I should be able to get someone into the property rather quickly.

What would be a good easy way out if I can’t find a buyer? Thought about running two different ads in the paper. One for a LO and the other for seller financing to give me more options to get someone in the property quick.

Thank you for your post.


Re: A PACTrust answer - Posted by Bill Gatten

Posted by Bill Gatten on July 25, 2001 at 13:16:09:

Fran, that’s a hard question to answer without sounding like I’m trying to sell you something (and I honestly don’t mean to be doing that).

First off to do a transaction that emulates a PACTrust, your would need to use a standard purchase offer indicating that the “sale” was a transfer of Personal Property interest in a land trust. Then you would need a good land trust document. Then you would need an Assignment of Beneficiary Interest and a Beneficiary Agreement (to specify obligations and responsibilities of parties). Next you would need a triple net occupancy agreement (so as to convey rights of occupancy and delineate tax benefits).

In addition, for maximum safety, you should (in our opinion) have a non-profit corporate trustee if possible, and a collection and bill paying service to handle payments.

Basically, any land trust will do, and any lease agreement will do (so long as it specifically sets out obligation to make all mortgage payments and handle all upkeep). The Assignment and Beneficiary Agreement are a bit tricky in that they must be structured so as to not appear constructively to be a corporation, association, security agreement, equitable mortgage, general partnership or a business trust (any of which, under scrutiny could blow the whole deal by removing the primary intent).

With all this said, Fran, you can do a simple land trust transfer as advocated by several of the teachers out there, and be named as the sole beneficiary (and even the trustee) if you wish. If everything goes swimmingly (as it most often will), you?ll be fine.

Bill Gatten

Lots of other things - Posted by Bud Branstetter

Posted by Bud Branstetter on July 24, 2001 at 21:00:51:

Bill mentioned the legal protections. They are for real. Enought reasons to do it that way. For another reason there is a wopping tax deduction for somebody that owns a percentage of the trust. You could leave that depreciation with them if they would subsidize that second. Or you could use it yourself if you make lots of money.

The best part is there are no other arrangements that allow you to “lease” it to them and allow them to deduct the taxes and interest paid. A normal lease just wouldn’t draw the income on a house this size unless you do allow them to write it off. It should go faster than than any other deal you can do.

Bill Gatten has been known to walk you, the sellers and the “buyers” through the whole thing. How’s that for service?

Re: A PACTrust answer - Posted by Bill Gatten

Posted by Bill Gatten on July 25, 2001 at 13:22:13:

Mike, I agree. They wouldn’t likely do that. I read Fran’s note as saying “?In addition to that, there is also a second?” and I presumed the $10K to be the equity the seller had. Upon re-reading her note, I clearly see your point.

Thank you for the clarification.

Bill Gatten