Well........ - Posted by David Alexander

Posted by Barbara (FL) on July 30, 2001 at 24:53:35:

In your opinion would HR’s friend (whose trouble appeared to start when he had a lot of “subject to” deals go into default) had any better defense if all those properties had been in Pac Trusts?
Barbara (FL)

Well… - Posted by David Alexander

Posted by David Alexander on July 28, 2001 at 16:09:43:

the answer is.

I think Joes Post below on a different topic is really the answer.

Pay the mortgages ahead a few payments… I personally dont do that, but do try and keep 3 months worth of payments etc. but I think in the future I may instead of just having a contingency fund make a payment or two extra… simple insurance really.

I also dont believe any of the CYA stuff would completely work even the stuff in the contract saying you would give the house.

You cant predict the future. And no matter what if you made someone mad and they are after you it will either work or it wont… if the government wants you… they’ll find a way.

I think that has to do more with timing.

Just understand as HR says this is a big peoples game, and there are risks.

I personally don’t see changing the way I approach a subject to deal very much, just realize there are risks, in the event we were to face an economic downturn, or rather when as Jack has said.

David Alexander

Okay, Ostrich… - Posted by TRandle

Posted by TRandle on July 28, 2001 at 18:14:04:

I don’t understand your position on this issue. I do understand you’re as stubborn and opinionated as I am in that “I’m going to do things my way”.

However, it’s not like you to not examine potential risks, and I too would like to understand why you see more risk in providing some seller recourse in the case of default. That objection frequently comes up in my discussions and I’m typically able to overcome the sellers concerns. However, providing some seller recourse would actually be a selling point.

Another concern I have (which recently surfaced) is that the number of folks who do this continues to increase. The REI seminar circuit only grows with more and more folks being exposed to this business. As we Texans have recently seen in both Dallas and Houston, there will be public exposure of deals gone bad.

There will be investors who don’t cover themselves and don’t mitigate the risk. The “dark side” of our business will become news. The benefits we provide won’t. Two of the sellers I met with last week brought this up. The first couple had seen TV coverage of an investor that didn’t make the payments. Another seller said her aunt had been burned by a “take over the payments” type arrangement.

No, I don’t have the details and that’s not my point. My point is that there WILL be media coverage of these deals and there WILL be court cases, depending on the particular situation.

If you think all these folks out doing Sub2’s are going to do whatever it takes to make things right once they go wrong, you’re tripping. One of the things that comes across in my presentations to sellers is that I’m more interested in the people than their house. I’ll walk from a buck if it’s the right thing to do, and as you know, have done so more than once. I think there are plenty of folks who won’t make that choice, and that will lead to more negativity for this business.

Providing seller recourse not only potentially protects me from civil charges becoming criminal, it sets me apart from the umpteen others in my area who do the same thing. It’s not much different than me physically showing the seller the alienation/acceleration clause in their Deed of Trust. “Oh, the other guys didn’t tell me about that”.

In my mind, an essential part of this biz is to expect the best, prepare for the worst, and just do it. To me, providing seller recourse is just part of preparing for the worst. I do NOT plan to allow the seller any “real” control that would mess me up, just a way to protect themselves if things got ugly.

As Hal likes to point out, the gurus don’t tell you the downside. I think some of them haven’t seen it so they can’t speak to it. It’s similar to all the 28 year old mutual fund managers a few years ago. “Buy!, Buy!, the market only goes up!”. Yeah, right.

We both know the person that has been referenced and my judgment is that he’s a good guy. He had good intentions and got burned. Perhaps it was due to size or particular methodologies or a combination of both, I don’t know. What I do know is that my gut tells me he’s a man of conscience and he learned some lessons I don’t want to face. I know Hal, JohnBoy and I discussed this at the convention and based on what I see, we’ll be doing it again at the next convention.

So, that’s part of my point. Not only does some form of seller recourse protect me and the seller (risk mitigation), I believe it’s the “right” thing to do as well. And I do agree with you in that I don’t want to give up control, but based on the input received on this topic, I can find a way or multiple ways to do both. I look forward to your response, my friend.

Re: Well… - Posted by JohnBoy

Posted by JohnBoy on July 28, 2001 at 17:02:25:

That’s the point! There ARE risks. Understanding and taking steps to limit those risks are also important. Just saying there are risks and willing to take those risks aren’t enough when you can do things to try and limit those risks. The more things you can do to limit your risks the better off you are.

It’s better to take steps to try and limit those risks in the beginning rather than shrug them off and say, if the government wants you, they’ll find a way. I’d rather limit the ways that could allow them to find!

It’s better to limit the risks every way possible in the beginning rather than have to be saying, wish I, could of, should of, why didn’t I, now I know, why didn’t I, if only, if I would of, etc., etc,. etc.

The more things you do to limit the risk, the less likely the government will want you and try to find a way.

So the sky is falling?.. - Posted by HR

Posted by HR on July 28, 2001 at 20:42:27:

Hey Tim,

I gotta say: I’m enjoying this thread. I don’t know if you know it, but I met Deep Throat (that’s my new name for my friend who went to due on sale jail) at the creonline convention a couple years ago! We actually were eating breakfast together and realized we were from the same town. I’m just one lucky guy who happened to meet one of the few folks who did go to Due on Sale Jail, and he was a major player, and I’m glad others can learn from his experience. As I know a few of you have learned first hand, he’s a good guy who has tremendous knowledge and experience and we would be wise to learn from his mistakes (which he shares, somewhat sheepishly, to help others). Deep Throat is trustworthy and I am glad we are friends. I have learned a lot from him and enjoy joking with him.

Now that we agree there are risks, and they can be substantial, now it’s time to figure out how best to mitigate them (or at least be aware that some can’t be mitigated). In either case, this is a high profit biz with rare but deadly risks. I’ll roll the dice. But I’ll roll them with my eyes wide open.


PS. Let’s start this debate. Is it really the seminar circuit that’s making thing worse, or easy access websites like this one? Don’t you think one of the thousands of bank employees just may stumble onto some of our techniques, write a promotion advancing memo to some mucky mucky higher up, which becomes a policy to prevent one of our tricks? Is that really that farfetched? I dont think so. That’s not a criticism of this site, just a recognition of the ease of access of our info and our vulnerabilities.

If I may… - Posted by Mark Lyne

Posted by Mark Lyne on July 28, 2001 at 22:24:30:

In the post found at…


This was mentioned about the PACTrust:

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.

This is such a disturbing observation to me; I felt I needed to reply.

It seems that everybody in this discussion is, at heart, discussing protection from civil charges; criminal charges; or protection from unreasonable people; but what I find most interesting is that it seems there is a desire to want to discuss protection from ourselves. I gather the last observation from the comment made, referenced above. What I take away from that comment is that if most folks think something too difficult to comprehend they should just disregard it.

Everybody continues to speak about limiting risks in “every way possible” but almost in the same breath we are speaking about the idea that if something takes too much effort to understand, even if it might hold the solution, it is worth twisting ourselves in knots before examining it.

Please understand I am not trying to be adversarial. However, as so many have stated throughout this discussion, this is a big game with big rewards and big penalties. If the penalties are so big then why would anybody ever say “Well, people have a hard time understanding it, so I guess we better not consider it. It’s just not worth the effort.” This “type” of thinking seems to me to be the real risk. As a quick thought to toss out there – Where would we be if the relevant groups of people responsible for the advances in antibiotics/airplanes/computers had succumbed to the same thinking?

Remember the name of the game is CREATIVE (thinking outside the box) real estate investing.

I am doing my first PACTrust deal this week, so, I don?t really have anything to gain or lose if folks look into the PACTrust. However, if the PACTrust delivers on what Bill, Jim, Bud and others claim. Isn’t avoiding “Due on Sale Jail” worth the effort to comprehend it? If you truly mean what you say in the post I am responding to:

It’s better to limit the risks EVERY WAY POSSIBLE in the beginning rather than
have to be saying, wish I, could of, should of, why didn’t I, NOW I KNOW, why
didn’t I, if only, if I would of, etc., etc,. etc.

I cannot speak for you or anybody else, but I would agree that these folks (I’m one of them) buying subject to should get off their collective rears and learn about the tool that could provide them the ability to limit the risks in every way possible (specifically the PACTrust method of buying subject to), would you agree?

I look forward to hearing from you.

Best regards,


and that further makes my point… - Posted by David Alexander

Posted by David Alexander on July 28, 2001 at 17:09:30:

I think there is bigger risk by allowing folks to be in some part of the deal.

David Alexander

I’m in the middle… - Posted by TRandle

Posted by TRandle on July 28, 2001 at 21:35:51:

On one side, we have what I perceive to be your viewpoint and on the other, Alexander’s.

You and I went a few rounds with this at the convention and I agreed there are risks. I do NOT agree that for the average REI (0 to 10 deals, maybe 20?), that the risks are “substantial”. However, I don’t plan on being average and I do believe in risk mitigation and doing what I believe to be right.

In my opinion the real risk is in having a large number of Sub2’s and defaulting on most, if not all of the payments. The sellers don’t want them back and couldn’t do anything with the properties anyway. An investigation leads to proof of a pattern or recurring business model. That spells trouble, and David’s assertion is that at that point, all the attempts to limit risk may not matter. Whether that’s true or not, I do think that anything that provides the appearance of an equitable or fair deal, combined with various CYA docs, will boost my case.

If the deals are purchased safely initially (with enough cushion in equity and cashflow to sustain a significant market decline), this risk is dramatically reduced. Granted, not all my deals fit into that category. So, again, I don’t think it’s a substantial risk, but I do acknowledge it’s there (never denied it) and it’s much simpler to attempt to address it now, rather than wishing I had.

As far as REI promotion, I think it’s a combination of numerous factors; seminars, websites, infomercials and lack of fulfillment just to mention a few. People are dissatisfied and looking to improve their station in life. The internet allows us instant communication and informational access. Any time I think about my CREO family, I’m amazed. I have friends, and I mean good friends, all over the country now. And yes, a large part of the credit goes to JP and Terry and folks who share a similar vision.

Take me for an example. My business practices and operations are fairly advanced for someone who’s only been doing this a couple of years. My guess is that in times past REI’s would go to their grave without ever stumbling upon Sub2. Nowadays, it’s thrown in their face within a very short period of time.

I meet with several folks each and every month who want to learn to do REI. True, most won’t do anything, but what that tells me is that there are literally thousands, if not millions of folks considering this as a business. Many of those will do something. Many will make serious mistakes and later discover they didn’t appropriately consider the risks.

Unfortunately, attrition of the larger fish makes for juicy headlines. Just look at all the connotations that surround the word “flipping” now. That in and of itself is not a big deal. People in that business just make adjustments and silently curse the investors that make this more difficult for the rest of us.

Geez, lost myself on the soapbox for a while. Sorry. As far as your bank employee scenario, who cares? First, I don’t think any intelligent bank president or committee is going to make decisions based purely on emotion. It makes no financial sense to throw dollars after performing loans without a serious financial upside to make it worthwhile (i.e., interest rates). Second, I would not be at all surprised to learn that much of what we do is already widely known among certain lending circles. As you point out, it’s not difficult to discover this site or others, or read books, etc.

Who will be the first REI to fall? Those that have not taken the necessary steps for privacy, asset protections, and risk mitigation. I don’t plan to be in that description. That’s one of the reasons I enjoy this site and sit patiently waiting for a good topic to surface, like this one.

For some, the Deep Throat story is an awakening to the downside. For me, it’s just proof that I have to continue to proceed cautiously, taking calculated risks, and doing my best to have contingency plans.

That was the reason I posted my question. I recognize a risk that I do not have covered and I wanted input as to possible solutions.

P.S. I’m not sure that what I posted is a good set-up for a “debate”, but I look forward to your response. By the way, I think you and David are both wrong. LOL!

Re: If I may… - Posted by JohnBoy

Posted by JohnBoy on July 28, 2001 at 23:10:37:


I have no problems about using PACTtrusts to do deals with. There are many tools to use to do a deal. Not every seller will go for a subject to deal. They might be open to a L/O though. I would venture to say the PACTrust would be in the same boat. If that comes off as to confusing or complicated to a seller then another method of doing the deal may be beneficial for the buyer to still be able to make a deal from it. No matter what way you do the deal, you should structure the deal to provide yourself with the maximum protection possible.

Even if the PACTrust is THE BEST way to go that offers the best security for everyone involved, I don’t think it will be the ONLY way deals will be made. Until any investor does go to using a PACTrust they should, at the very minimum learn how to minimize their risks involved regardless of which method they choose.

Many don’t understand the PACTrust. They SHOULD learn to understand it if they’re going to be involved with real estate investing. But that doesn’t mean they WILL do it. Many will continue to do what they feel comfortable with doing. Many are doing deals without doing everything possible to minimize the risks involved. Should we all say, “well then suffer the consequences if you refuse to learn about doing a PACTrust???”. I don’t think so. I think if they’re not going to change their methods on how they do deals then they should be concerned about the potential risks involved using their methods and take the proper steps to minimize those risks.

I haven’t read the course yet, I do have it, just haven’t had time to go through it right now. But I’ll guess that most of the mechanics of the PACTrust could be incorporated into adding protection that makes doing simple L/O and subject to deals much safer. I know, why reinvent the wheel then? Because some people may never get it or find it to confusing to even try to get it.

One of the biggest concerns I had with the PACTrust was, if it was hard for ME to comprehend, then how will I get most sellers to understand it? Or worse, how will I get most attorneys to understand it? Or even worse, how would I get a judge to understand it???

Trying to explain this to these professional people, a PACTrust would be like talking to them in a foreign language!

First, every investor that would use a PACTrust is going to have to understand it themselves. Then, they’re going to have to know how to get their sellers to understand it. Then, they’re going to have to find a REALLY GOOD attorney to get them to understand it. Then, that attorney is going to have to be GOOD enough to get some judge to understand it. Finding the right attorney is going to be a project in itself, muchless finding one good enough to present any case before a judge to get the judge to understand it.

That doesn’t mean you shouldn’t learn about it and eventually seek out the right people that will understand it so they can properly protect you and represent you when the time comes. Unfortunately, I don’t see most people going through the trouble to get themselves properly set up to use this in the near future. So until that happens, there will be people out there using many different types of methods to do deals with. Doing Subject To deals happens to be one that I can see some serious risk involved if not properly structured. One of those risks is by NOT giving the seller some form of recourse to get the property back. Most people doing these subject to deals don’t do that.

My whole point behind this is, IF YOU ARE going to do subject to deals, then protect yourself as much as possible and give some serious thought to structuring them to where the sellers do have some form of recourse against getting the property back.

It’s easy to just tell everyone to use a PACTrust and it will protect you better than these other ways of doing deals. But the reality is, everyone isn’t going to do it. So rather then just keep telling everyone to use one particular method to buy property, tell them about any potential risks that are involved with the different types of methods they ARE going to use and try to provide them with the things they should do to provide them with the most protection they can using what ever method it is they do choose to use. Wouldn’t you agree?

Re: and that further makes my point… - Posted by JohnBoy

Posted by JohnBoy on July 28, 2001 at 17:27:59:

By allowing a seller to retain some form of recourse if the buyer defaulted is not allowing them to be in the deal.

All banks have recourse against the property when a buyer defaults. This would be no different.

I think your risk are BIGGER my not allowing the seller ANY recourse at all.

What risk do see by allowing a seller recourse to get the property back IF you were to default and couldn’t cure the default within the time allowed in the contract???

The greatest risks… - Posted by HR

Posted by HR on July 29, 2001 at 14:12:13:


Once again, you are the voice of reason and class. For the record, let’s acknowledge a few things: 1) this discussion to subject to risks applies for the folks running and gunning in them. You, David, Bud, others. The guy doing a few a year has very low risk and shoulden’t be concerned other than loans called due.

  1. The greatest risk of all is doing nothing. Since 95% of folks retire broke, the most risky thing to do is nothing. If someone decides to avoid subject to deals completely, because of some of these arcane risks, that would be a bigger risk than engaging in a few of them.

Me, I can’t wait till we get to phase III. I want to talk about the risks, and acknowledge their relative weight, so we can come up with better strategies to counter them. Otherwise, what’s the purpose? Fear creation? Distraction? Not my cup of tea.

As far as the internet goes, you again, my friend, as always, are wrong. lol (I coulden’t resist). No question: you and I and many others have profited by this site (and others like it) that have jumped started our sophistication by decades. No doubt.

But, I don’t think my scenario is farfetched. Deep Throat found a mortgage website (before the countrywide threat) that talked about red flags in deals it would fund, and one of the red flags was a property recently put into a trust! No question the easy availability of the internet will hasten the disclosure of our secrets. Let’s drop this “discussion”; there’s nothing we can do about it. We can do something about minimizing our risks, once we acknowledge what they are.


Re: I’m in the middle… - Posted by Jack

Posted by Jack on July 29, 2001 at 09:35:07:

Here are just 2 scenarios?there are many others.

Lets say you are TRandle Real Estate Investor (sorry Tim) and you have been rocking along for a few years and you have done about 50 subject to deals and xx number of creative deals… along comes a mass layoff in your town, an local or national economic down turn, whatever (lets call it the “event”)…and in month 1 of the event you note that 10% of your deals missed the monthly payment. That?s 5 payments at $1,000.00 each???

Well a few of them catch up (say 1/2)and along comes month 2…5% more go delinquent well now you have 2 1/2 from month 1 that are 2 months past due and 5 from month 2 that are 1 month past due…the numbers add up very quickly. Now at 45 days you are at 8k and climbing?..

To save the day, you decide to give the properties with problems back to the original seller…after all that is the right thing to do and you are not liable right???..and you will account for and repay him all the money that you collected…all your profit from the deal. All the Buyer’s downpayment(s) or option $$. All the monthly spreads…And you are upfront about it. You made $XXXX.XX. BTW, in order to get a full release of liability from someone you must disclose fully to them otherwise the release is not fully effective. So if they know how much you made, then and only then can the seller release you from liability to the seller. (Not to the federally insured mortgage holder, but more about that later.) When you show them you made XXXX.XX they will want all or part of it.

Well, the seller (if you can find him) looks at that and says one of two things:

#1) "You made $XXXX.XX on my property while in your “name”. You have done very well, so catch the payments up and give it back to me.

…a)Problem is…you no longer have the cash to do that. So, fair is fair, you account for the receipts for that property only and disclose to him?Meanwhile…the occupant is not moving out, he has filed BK or he has generally thwarted you attempts to remove him…just for a month or two after you discovered the delinquency.

Can we all agree that now it is not too farfetched to be 3-5 payments down on this one deal?

Well, under our scenario, thats 3-5k per property.

Anyway, you made $$$ on it, true, but you used it, lived on it and most importantly, now during this event, you have several of them going bad at the same time, so any cash you have must go to the title companies, attorneys, accountants to unwrap this mess and don’t forget…you too meanwhile have to keep food on the table.

…b)So, the seller says, give it back and I’ll forget it. But bring it current. So, you fork over 3-5k in payments and get a release and walk away. Or you don?t fork over the bucks, it does not matter at this point.

Lets all remember that the ?event? is preventing several of the occupants from making the payments so likely, since your livelihood is tied to the economy, you have a problem too?

BECAUSE, YOU SEE, YOUR PROBLEM IS NOT JUST NECESSARILY WITH THE SELLER. It is with his mortgage company. You have caused this loss by your actions or even your inaction. You did not screen the occupant, you did not remit the money that you made on the deal to bring the now past due mortgage current?..whatever?even if the property was delinquent when you first bought it and you caught it up and the above happens.

What if the seller keeps the $$$ you paid and elects not to bring it current? It is his choice. After all, he was not keeping the property when you first bought it from him, and now, his credit is hit (again) with a mortgage history delinquency. He lets it go back to his mortgage company.

When he files his taxes and discovers the financial obligation the foreclosure has placed on his tax liability, he is upset and tells the examiner that you are the guy who got him in this mess. And he knows for a fact that you have done it to a few others cause you originally told him the business you are in. And you just recently told him you cant’t pay him cause you have other problems and thats where most all of your funds have gone.

When he goes to finance his next house, his car, whatever, he discovers that the mess you got him into causes his rate to be super high and he places a note in his credit bureau file that you are the guy who ruined his credit…he is not responsible cause he sold it to you and you could not/ did not pay him.

Believe me, he will conveniently leave out the true details. You are the bad guy. After all, you bought the property from him and whatever you did, you stopped paying the notes.

When he goes to his attorney, if you didn?t pay him all the money, his attorney says this transaction is very one sided and he suggests that they sue you for unjust enrichment. After all, you profited from his property and gave him nothing.

When they go to court everyone looses except the attorneys. It will cost you big bucks to defend but most important, it will deplete the balance of your funds and even before the court date, UNDER OATH you will have to tell them about the other similar transactions…all of them… the good ones, the bad ones, all the trusts… Your tax returns, your checkbooks, your phone bills, credit card bills…there is no hiding it.

So now they know about your business and the fact that you have several of these in the same or similar situation. Some you worked out. Some you did not.

Upon getting a court judgment against you for the unconscionable act of profiting from the sellers situation, they begin to realize that they can?t get your assets, cause you have trusts, corporations and you have shielded them cause that?s what you have been trained to do?.then they decide to take other measures. You have never paid the price for what has happened to them in fact, you have not been affected at all.

What do you think they will do?

#2) The seller looks at the situation and says?no?you keep the property, I still have other problems, I filed BK, I am getting a divorce, I can?t afford it today anymore that I could have then, I am sick?whatever. He will not take it back.

So, you fight the occupant, get him out and either resell the property and/or lose it to the mortgage company yourself.

The seller still has the same problems as above. He is not happy. But, it just may take him awhile to figure this out.

You are still to blame. And remember, the problem is not only with the seller, it is with his mortgage company.

So here you are and you have faced all these problems and made them right. But you have only done your part. You can not affect what others do.

When a number of these deals go bad and someone (the Seller, the occupant, the mortgage company) loses money or has been inconvenienced, you could be to blame.

Once the Bell has Rung, You Can Not Unring It.

So, lets think about it this way. A subject to purchase by one of us should only be (if you insist on doing them) a short term (12-24 month) method of acquisition and it should be refinanced by the occupant ASAP. It should contain, at a minimum, 2-3 months contingency and be fully disclosed to the seller. It should be monitored by a third party collection agent and any problems addressed immediately. The prospective occupant must be screened and an exit strategy in writing devised and adhered to.

This guru business of ?just take it back from them and do it again? is full of holes.

Remember, the problem is not just only with the seller, it is with his mortgage company. So the disclosure part of the scenario is only partially protective.

Oh, I forgot?.you are not liable, right???

Don?t get me started

Sort of… - Posted by Mark Lyne

Posted by Mark Lyne on July 29, 2001 at 12:15:21:

I agree with the point that people need to be smart and protect themselves.

Because we seem to be discussing so many different things in each post, I would like to address your note one point at a time. I am easily confused. :slight_smile:

In the first paragraph, I agree with the statement that ?There are many tools to use to do a deal. Not every seller will go for a subject to deal. They might be open to a L/O though.?

Even though I agree with the statement that there are many tools to do a deal, I don?t really understand the difference to the seller between a ?subject to? deal and a L/O.

It sounds to me like we are speaking apples and oranges here? As I understand it, buying ?Subject To? is one of a bunch of entrance strategies, whereas, L/O is one of many exit strategies you could use if you have bought ?subject to? going into the deal. Now, I can hear some of you already, ?Well, if you buy and structure a Sandwich L/O then you?re not buying ?Subject To?.? In my mind, yes, you are. Unless the guy doesn?t have a loan and then the whole conversation is moot, because he has all of the protection any lender or landlord has currently, which seems to be good enough for the courts.

The point here is I see no measurable difference between a seller going for a ?subject to? deal and being open to a L/O. Except perhaps, in his mind he might PERCEIVE a difference, and that would come from the way the investor explained the deal.

Let’s agree on one thing moving forward… that is, if, in fact, you do agree :wink: We are talking about taking control of a property while leaving the existing financing in place and how to best protect ourselves from civil or criminal charges in structuring such a deal.

Let me leave it at that for now, there is a lot of other stuff I would like to touch on from you post above, but if we can get each thing cleared up one at a time, maybe we can move to an understanding that would benefit everybody who is watching this thread.

I look forward to hearing from you.

Best regards,

Part III… - Posted by HR

Posted by HR on July 29, 2001 at 14:34:32:


You’re jumping ahead! I agree with your suggestion of possible threats to subject to deals, and while they may be remote, at least we can acknowledge that they are risks nonetheless! To summarize, then, we might say that the subject to risks include:

  1. mortgage acceleration. This will potentially create severe problems with my seller’s credit. It can also create problems with my buyer’s cashflow, living situation, etc.

  2. The second threat is that if I do a lot of these, and a few default, and those that default end up in court, I could have big problems. I may have a class action suit against me, the fed/state/lending lawyers may take the case to get me, etc.

I would agree with this analysis of the risks.

Now, the question becomes how great are these risks and how great are the potential rewards?

I think we all acknowledge that the potential rewards are great, so great, in fact, as to merit doing subject to type deals. I think the risks of #1 are low and of #2 very low. Still, they are risks that exist. So, assuming we now agree on what the risks are, and we know their relative weight, it now behooves us to ask: What can we now do to mitigate these risks?

I suggest the following (and I invite suggestions from others):

  1. Buy in trust to not just hide the DOS violation, but to hide from others the number of subject to deals you have done (can later be disclosed under oath).

  2. Use corps and cya letters; why not.

  3. Fully disclose to the sellers what I’m doing and get to sign on CYA.

  4. Close the deal like a regular sale; no kitchen table funded closings. Atty closes and notarizes the CYA.

5)Keep the term short to avoid “events” from destroying one’s business. 12-24 months. 30 year am with 24 month balloon. Only place in guys who can potentially perform in 24 months (note: risk here; how can you reliably know or assure that?)

  1. Have a contingency fund to make some no pays, should they occur. At least it makes it look more legitimate.

  2. Have a third party escrow disburse the payments, again to provide further legitimization. This should not cost too much.

8)Get the guy on the back end funded to avoid the disaster case scenarios.

Now, all you subject toers: is this how you are doing it? What about inserting a mediation clause? A clause to give the property back to the seller in case of default?

I’d love to ask, How does a vehicle like a PacTrust, potentially decrease or increase these risks?, but that’s for a different thread (Understanding the PacTrusts pros and cons and risks, and thereby mitigating them as much as possible, is the eventual goal of that thread.) Ideas, anyone?


Re: I’m in the middle… - Posted by Chuck Perry - TX

Posted by Chuck Perry - TX on July 29, 2001 at 13:55:11:

Hi Jack,

I know we spoke about this on the telephone, but I have one that is going south right now; however, I feel that I am on top of it.

What steps do you take to assure the seller, or settlor-beneficiary (PACTrust lingo), inorder to keep things onthe up and up? Since this thing started going south, I inititated contact with the settlor-beneficiary and gave them a SitRep (Situation Report) and the action that was following. The settlor-beneficiary then thanked me for the information and asked if he could do anything to help.

One of the mistakes I made was cleaning up another investor’s mess; however, a cardinal rule I have with these “subject to” deals is 12-24 months max and equity has to be there. Also, I know David Alexander says never shut down the buying machine, but being analytic and having software and spreadsheets to analyze my cashflow requirements given the current liabilities and inflows - I sometimes make a business decision to do less deals.

There was an interesting example in the book the software package included. It showed a “profitable” company going bankrupt due to poor cashflow management. It goes along with the quote from Eric C. regarding ranches going out of business in the best of times. I guess the economy has a way of testing those who truly understand cashflow management.

To quote an MIT economist, “Cashflow is more important than your mother.”

Thanks Jack and I look forward to speaking with you again,

Quick questions - Posted by Tim Jensen

Posted by Tim Jensen on July 29, 2001 at 12:14:35:


First off, I am very impressed with your details in this post. You really thought this through!

Now onto my questions.

  1. What if you do this in a corporate name. Don’t you think that will help to defer liability, as long as you can show that there is no fraud, how can they pierce the corporate veil?

  2. I can see how someone could get sued, however, if they have no money where are they going to get the money for an attorney? I know there on contigency based attorneys, but why would they take this case when they can make easy money on the insurance claims?

Thanks for this post,

Tim Jensen

Re: I’m in the middle… - Posted by Mike

Posted by Mike on July 29, 2001 at 12:09:45:


What are your thoughts on the PACtrust as it relates to the scenarios you just covered.



Re: Sort of… - Posted by JohnBoy

Posted by JohnBoy on July 29, 2001 at 12:48:29:

In a subject to deal the seller is giving you the DEED to their property. You now OWN the property and the seller has relinquished all their rights of ownership while remaining liable for the loan that is in their name.

In a L/O the seller is only LEASING you the property while giving you the OPTION to buy it at a later date. Your contract allows you, the investor, the right to sublease the property.

The seller has NOT given up any ownership rights while you’re just leasing the property from him. He’s given up some control of the property, but not his ownership until you exercise your option and pay him off.

So no, a subject to and a sandwich L/O are not the same.

If I default on making my RENT payments under a L/O the seller can evict and get possession of his property back.

If I purchased his property subject to his existing loan and I default on making the payments, the seller can’t do squat about taking his property back. He gave me the DEED and by doing so he gave up all his ownership rights and has NO recourse against getting the property back. At least that is the way everyone has been structuring these subject to deals. That is what this entire debate got started about. Allowing the seller to have some form of recourse against the property to add additional protection in the event someone wanted to try and pursue criminal charges against you.

A L/O and a subject to are two complete different animals and have nothing to do with what one may perceive.

In one, you have a lease with an option with the seller and the seller retains ownership until you exercise the option, IF you ever exercise the option.

In the other, you get the DEED and seller relinquishes their ownership rights of the property to you.


I think you’re confusing the context of how subject to is used when buying a property “subject to” vs. subject to used in the context of, subject to performing certain things or conditions.

Whadder you up to HR? - Posted by Bill Gatten

Posted by Bill Gatten on July 29, 2001 at 22:21:11:


These are excellent comments by you and Jack, but it appears that your solutions to the prblems posed are very much akin to the PACTrust scenario. In the other thread your are all over it like ugly on a booger, but here you are virtually building it as your remedy.

Bill Gatten

Re: Quick questions - Posted by Jack

Posted by Jack on July 29, 2001 at 12:34:54:

Doing this in a corporate name will have nothing whatsoever to do with it. Same Problem…it is you…

The attorney could be his brother in law or even Legal Aid or even in proper person in small claims court.

I don’t know that it matters…in fact if they can’t afford an attorney, it looks all the worse for you.