Subject To and Bankruptcy - Posted by Randy Joiner-GA

import · May 13, 2001, 7:17pm

Posted by JT - IN on May 17, 2001 at 22:36:32:

The BBB is a good idea. I am typically buying 10 properties at Shriff Sale, for every One that I am buying outside of sale. Soooooo, to me, it is not a big issue aobut whether Seller thinks that I am credible, or not, but hen I am very independent about such matters. If I were going to seek more deals form Sellers, (subject-to or pre-sale Fc), then I would endorse the BBB.

In theinterview, I simpy ask if “Are you behind on any other, bills besides their motg pymt?” If someone answers No, to this question, then I will definitely be suspect! Can you imagine paying your MC or Visa, before your mtg pymt? I know people do such ridiculous things, though.
It is just a matter of structuring questions (stop and write down a list of everything that you could possibly ask a homeowner in this situation), that will be telling signs, as to where the Seller is.

I try to use some softball questions, just to get people talking. Once you get some people talking, they will tell anything you want to know, (and many things that you do NOT want to know). What you are doiing here, is getting ppl to talk about theri favorite subject; THEMSELVES!

I think of myself as “Columbo”, on an interview like this. I’m sure that you have seen those episodes, “Just one more question, @#$…”.

Have fun with it!

JT - IN

import · May 13, 2001, 7:17pm

Subject To and Bankruptcy - Posted by Randy Joiner-GA

Posted by Randy Joiner-GA on May 13, 2001 at 19:17:20:

Please explain to me in what ways are you better protected by having the deed, when the original owner files a bankruptcy proceeding, than you would in a CFD or L/O. The property is still mortgaged against the loan which is going into court, so wouldn’t you lose it either way? And if you didn’t for some reason, wouldn’t the bank/mortgage co. be made aware of the situation and maybe call the loan due? Your input appreciated.

import · May 14, 2001, 10:09am

Re: Subject To and Bankruptcy - Posted by B.L.Renfrow

Posted by B.L.Renfrow on May 14, 2001 at 10:09:00:

I’ve not encountered a seller’s bankruptcy on a subject-to deal, although I was faced with a L/O seller going bankrupt a while back. Because I had neglected to record a performance mortgage, or anything else, nothing prevented the seller from promptly deeding the property back to the lender, despite my objection, even though the loan was current.

In the subject-to situation, my understanding from the experts is that…it depends. First, one would assume the BK attorney would always advise his or her client to include the mortgage debt in the petition, assuming the seller is no longer living in the property and no exemptions apply. I’ve heard people say they’ll just ask the seller to not include the loan…but I can’t imagine any attorney would recommend such a proposal.

Now, what is the lender going to do about it? If the loan is current and payments are being made, perhaps nothing. It would make little sense to go through the expense of foreclosure when payments are being made and there are no arrears, especially if there’s little equity. Since the mortgage remains in effect despite the bankruptcy, the lender’s security interest is unaffected, so they still maintain the ability to foreclose down the road if you stop paying. What they would lose is the ability to sue the original borrower for a deficiency judgment in the event of default.

On the other hand, the choices made by banks aren’t always rational. It’s certainly within the realm of possibility that a lender COULD choose to foreclose based on the seller’s BK. I doubt whether there are any real hard and fast guidelines in this area; rather, it’s something examined on a case-by-case basis.

However, if you have the deed when the seller files BK, I think you’re in a more secure position, since that removes the seller’s ability to offer the lender a deed in lieu of foreclosure.

As to whether I’d communicate with the lender when the seller filed BK, I’d probably just sit tight and see what they did. If they started making noises to indicate they were planning to initiate foreclosure, I’d certainly talk with them. But I wouldn’t do so right up front. I’d just keep up the payments and hope they would ignore it.

Of course, the other issue is the possibility that if there’s a lot of equity, and you took title within a year of the seller’s BK, the bankruptcy trustee could order the sale reversed under the BK laws as a fraudulent transfer of assets. If there’s little equity, it’s not likely an issue. How much equity is “little”? I don’t know, though I’ve heard that if it’s less than $25-$30k, they probably wouldn’t bother…but I certainly don’t know that for a fact.

Brian (NY)

import · May 14, 2001, 8:54am

Re: Subject To and Bankruptcy - Posted by eric-fl

Posted by eric-fl on May 14, 2001 at 08:54:30:

Though this has never happened to me personally, I anticipate someday it will. This is why I am leaning more in the direction of Subject-to deals rather than lease/options. According to Bronchick, who addresses this in the cash cow course, you file for a “relief of stay” with the trustee of the bankruptcy court. In this case, it’s better to have a deed rather than not, because you are the owner of the property, vs. being a tenant, and you can make a case for equitable interest, and the fact that you are making timely payments. At least, that is how I understood it.

import · May 14, 2001, 11:05am

Re: Subject To and Bankruptcy - Posted by JT - IN

Posted by JT - IN on May 14, 2001 at 11:05:06:

No need to worry about the lender here, filing for foreclosure, because the BK will stay any FC action. Possilby after a discharge of the asset, they may consider FC, but doubtful, if loan is current.

The larger rsik here, is the BK trustee. If the Seller lists the house as an asset that they have transferred within the last year, as thye should, you will undoubted here from the trustee, especially if they reviewed the sale, and understood that the mtg. is still in place, and in Sellers name. As far as whether they will order sale recinded, it will vary from case to case. Best to just understand that there is this risk involved in doing a subject-to deal.
I had previously posted about checking a Sellers credit in a pre-sale purchase, to determine whether they are “at-risk” of filing BK. I will not buy pre-sale property without doing so. I haven’t been doing subject-to deals, but I see no difference in this and pre FC sale purchasing, so far as the recission risk by BK trustee.
Just one of the many pitfalls in Creative RE investing.

Just the way that I view things…

JT - IN

import · May 17, 2001, 3:40pm

Re: Subject To and Bankruptcy - Posted by SubjectDeals

Posted by SubjectDeals on May 17, 2001 at 15:40:24:

JT, checking the credit of the seller first is a good idea. My question is this: How would you bring that up to the seller who is deeding you the house for free?

How would I go about explaining to the seller that I need to check their credit? How would something like this sound:

“Well, Mr. Seller, I will be making all your payments for you until I get a T/B in your house and I will also be making all the repairs and I will be putting a lot of my time and effort into your house and I need to do a credit check because …”

Please fill in the blank. I get a blank when I get to the last word (“because…”)

Also, I think asking for a credit check can go two ways: 1.) It will make you look like a more serious investor. More business-like and 2.) The Seller might ask if they can do a credit check on you too.

Thanks in advance. John.

import · May 17, 2001, 9:01pm

Credit Report on Seller… - Posted by JT - IN

Posted by JT - IN on May 17, 2001 at 21:01:26:

Let me answer your second question first: If Seller wanted to see my Credit report, I would show it to them, not let them pull it. I am fortunate that I have a recent copy, and have NO negatives there. There is no shortage of credibility, with me, and I would also show them a copy of my Net Wroth statement, if there is still a rub here. Again, here, I have some long numbers, so it is never an issue.

However, this usually never comes up, and I will tell you why. I know that we will play by the rules that I want to play by, or I will not do this deal. Now, ask yourself, who, in this example, needs to do this deal the most. I know the answer, and from the attitude that I portray to the Seller, (not arrogant), they will understand that this is one of several deals that I am looking at doing, and if there is a problem with them not letting me see what I want to see, I will walk away in a NY second. Not that I will not attempt to finesse and sell the info that I am looking for, but the bottome line is the bottom line. My Terms!
Now, am I just being egotistical here? Is that the reason that I have to do things my way? NO! Things have to be done my way, because I have tried doing things the Sellers way, and I know of the problems that I have had with deals, they are the deals that I deviated form my plan, and tried to accomodate their rules and comforts. No more! Politely, it is my way or the highway!

Now to answer your original question, I never ask them if I can check their credit. Now isn’t there something wrong with that? NO! Because I get them to aurthorize it in writing, giving me a release, when we are signing papers; purchase contract, personal info sheet, (is a mini credit app, like rental appl) and then an authorization for release of information and to check credit. Occasionally, there will be a question about this, “why do you need this form”? to keep all of us out of trouble with the courts and blah, blah… Once you get to this point, things are home free.

Now, prior to this point, in Q & A, I have qualified them out as far as other debts and financial problems, etc. The credit check is just to keep them honest.
Each situation is always a little diferent, but that is basically the way that I do it.

One of the worst things that could happen to you, (in a subject-to or pre-sale foreclsoure deal), would be for the Seller to file BK, and have the Trustee recall the sale, after you have re-sold or L/O the proprty. You are not only going to be writing a check to the Trustee, for your proceeds in this sale, but maybe something to the Buyer, for theri trouble endured here.
Now, admittedly, this isn’t going to happen very often, but if you screen these deals right, you will know that it won’t happen at all, on one your deals.

Sorry for the length her; enough said!

JT - IN

import · May 17, 2001, 10:15pm

Re: Credit Report on Seller…GREAT POST! - Posted by SubjectDeals

Posted by SubjectDeals on May 17, 2001 at 22:15:50:

JT, reading your post answered my questions and also gave me some ideas. Credibility can make or break your deal. One could probably join the BBB to help even more. Have you tried that?

One other question I had JT:

“Now, prior to this point, in Q & A, I have qualified them out as far as other debts and financial problems, etc. The credit check is just to keep them honest”. What things can I do to have them prequalified for debts and financial problems they might have?

JT thanks for all your help. I’m sorry for driving you nuts with all the ?'s, but this is good info and I will use it. Thanks again.

John.