I have a couple of questions for you, if you don’t mind. What is your experience with the PACTrust? If you were to compare your subject to scenario, including all of the necessary disclosures you feel are necessary, with the PACTrust; which would you say is more economical to execute?
These Guru type teachers leave out many things. They teach that the Subject To form of acquisition is this and it is that… It is similar to telling someone to buy your car cause it can go from 0-150 mph in 3 seconds and neglecting to say “but only down an iced ski slope.”
They leave A LOT out…even those of you who are doing it may not have not run across any of the “darkside.”
A few thoughts…
Disclosure (CYA)in THE PURCHASE AGREEMENT and IN THE ACTUAL SALE DOCUMENT filed in the public record. AS WELL AS A SEPARATE DOCUMENT
Rather than a straight subject to deal that ya’ll are doing, give the Seller what I have called a “mirror wrap note” that is… wrap the existing mortgage $ for $…term for term…except make the mirror note fully assumable and generally “nonrecourse” to you (that is no personal liability or you could even make your liability a stated amount- say 80% of the QUICK SALE present appraised value as determined by an appraiser appointed by the parties in writing at the closing) That means that of the note you give the seller, you are only liable for 80% of a very reduced price… hence no real liability and that liability is to the seller not the mortgage company. They won’t ever do anything about it in the event of a problem but they could if they wanted to…thats important. Rather than them having no control in the event of a problem. Get the Seller to admit in the docs that the property is presently over financed or what I call “fully” financed or otherwise unmarketable or sellable through the conventional methods he has tried and that he agrees that this is the best way to sell it. This mirror wrap note gives the seller “something.” A copy of this note can be shown by the seller to a new lender to help him qualify for a new loan if needed. It is placed on his financial statement as an offsetting asset to his lender liability.
The mirror wrap note is made to be assumable, wrapable and should be collected by a third party trustee type…like a Bank or a Note Collection Service so that the mirror note doesn’t get misplaced and you don’t have to deal with the seller again and the seller has someone overseeing the collection and disbursements monthly and you have the ability to have someone that you can look to providing accurate accounting and when you resell on wrap or on lease/option/purchase your new buyer can pay them.
Giving the property back to the seller after a default (even the DOS violation) DOES NOT eliminate the problem. Generally the mortgage states that the right of reinstatement after default does not apply to a DOS type violation, so you and the seller still have a problem that only the complete payoff of the loan can solve.
Written instructions should be given to the collection agent to file a pre signed resale back to the seller in the event of a default. I would suggest a contingency fund of perhaps 2 or 3 payments with a release of a contingency payment after each 12 on time payments of the underlying mortgage note.
5)When the property is disposed of by you on a wrap or option or lease, the method of disposition documentation should be additionally pledged to the wrap note at the collection agent with instructions to forward the difference to you each month. The contingency fund can even be funded with your profit each month until fully funded.
The above suggestions are by no means all the protections and safeguards available. They cost a bit (the appraiser, the contingency fund, the filing of additional documents, and the collection agent’s set up and monthly fees.)
If your seller is truly fully informed as to the type of transaction they are entering, you should offer these items as further security and as a “selling” point to “get the deed.”
Let me suggest to you that these things are worth it if push comes to shove and that if you are to obtain a property in this manner there should be a “price” to pay for the profit potential and lack of risk to you and the risk to the seller that is involved.
I also know that most of you reading this would not like to have these safeguards because of the real cost involved in setting them up but I would suggest these at a very minimum and there are several more if you insist on going subject to…
I recently spent half a day looking at real estate with a board certified real estate attorney and he thoroughly trashed a number of well known ?subject to? courses by the gurus. I just closed on a deal today at a title company buying a house out of a land trust and had to spend 30 plus minutes on the telephone with the vice president of this lender whose first words out of his mouth were, ?This better not be some Bronchick thing.?
The attorney I work with has also strongly recommended disclosure documentation (CYAs) and I now treat ?subject to? deals like a formal closing. We go down to the attorney?s office and 20+ signatures later, we?re ?closed.?
If you don?t mind, I would like to see some of your documentation for review purposes only. Please e-mail me.
Jack,
Is it your opinion that these safeguards and others should be implemented on each and every purchase, or is there some threshold limitation as far as volume of properties?
In other words, as with many aspects of this business, risk mitigation and asset protection becomes a much larger issue when the nominal number of properties increases.
Would you think that some investor with 5, 10, 25, 50, etc. properties should follow these recommendations?
Also, do you think that a one-property problem would present serious risk, or are your recommendations for someone that might end up in a situation where they are unable to pay on most or all of their properties?
Posted by Stacy (AZ) on July 27, 2001 at 11:35:35:
Hi Jack-
I appreciate your additions to the discussion. You make some good points, and I can tell you know of what you speak, and have investing experience.
I think the main difference between getting the deed subject-to in a land trust and doing a wrap is in the “cloaking” of the transaction. When you wrote:
“1) Disclosure (CYA)in THE PURCHASE AGREEMENT and IN THE ACTUAL SALE DOCUMENT filed in the public record. AS WELL AS A SEPARATE DOCUMENT”
this brings to the forefront what I am speaking about. There is a perception, right or wrong, that keeping DOS violations out of public view affords the investor an additional layer of safety from the title transfer being discovered by the lender. With no proof in the public records, and a land trust trustee that cannot divulge details about the trust’s ownership, it seems to make sense that the transfer would be difficult to uncover.
Now, I’ve been told by several in the lending industry that wraps are not a concern to lenders. I know they happen every day, and I’ve never heard of a wrap being unwound because of the DOS issue. As a matter of fact the mortgage broker who made me my last investor loan told me there would be no problem if I wrapped my loan when I sold the house, which is exactly what I did. However, I didn’t record the Land Contract, as a precautionary measure.
What are your feelings regarding the lending industry’s thoughts about wraps that violate the DOS clause?
I think that since you are in this business for the long run and full time you should implement these safeguards on each and every deal.
I know that the safeguards I talked about are a little more expensive than those promoted by others (which are NONE), but the key here is to have a safety net.
I really believe that each and every deal should have these or just let your competitor do them cause in the end, trust me, he will fail when (not if) the economy changes…
Remember, you have the ability to even invest the contingency fund in something like short term discounted notes, car paper, real estate commission advances (thats what I do) so that the income from that investment will help you build a fund.
Just remember, when your Buyers refi, the fund is yours… so, the sooner the better…
By the way… hope everythings going good for ya’ll… Let me know…
Remember- a Mortgage Broker is not the lender so sometimes they say what they need to say to make the deal happen…
I think that a wrap violate the DOS but so does the subject to transfer…the wrap is better. Either way, if they look (which is doubtful) they will see the subject to sale or the wrap…both forbidden…the mirror wrap is better because it gives the seller something whereas the subject to deal leaves the seller with no control over his asset that he is still liable on. I hope this helps…
Posted by Stacy (AZ) on July 27, 2001 at 19:30:36:
Jack, I don’t agree with one of your points. If the lender looks in the public records, how will they see the subject-to sale? All they’ll see is a deed into a trust. This is not a DOS violation, per the Garn act, and looks exactly like millions of other estate planning trusts. The part that DOES trigger the DOS, the assignment of 100% beneficial interest to the buyer, is not recorded, thus invisible.
However, with an AITD or recorded Land Contract, the sale is there for all to see.
But I do understand that you believe in giving the seller some recourse. This could be done with a performance mortgage (I’ve done it) allowing the seller to foreclose after a certain period of delinquent payments.
I have been factoring real estate brokers/agents commissions. Very Short term. Super High yield. Low risk (after my set due diligence package) if you are interested, email me and I will get you some info. I would love to do it in other parts of the country.