Dallas-Fort Worth Real Estate Investor Club

Mechanics of a Subject2 Deals

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  • 11 Oct 2016 5:37 PM
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    Message # 4301157
    Deleted user

    So this is how I understand the Subject 2 process:

    1. create a land trust (revocable) with an obscure name and make sure the beneficiary has the ability to hire and fire and direct all trustee actions.
    2. Have seller deed the property to the trust and make themselves the trustee and beneficiary of the trust 
    3. Have seller sign another side agreement where they assign their beneficiary rights to your LLC which is a SERIES in your SERIES LLC
    4. Fill out another form whereby the SERIES LLC then appoints a new trustee (unrelated person) with a PO box for a mailing address.
    5. Have seller sign a LIMITED POA (allowing you to act on their behalf on anything concerning the property)
    6. Send a letter to the lender directing them to forward all correspondence concerning the property to the trustee
    7. Contact the existing insurance company and have the SERIES LLC added to the insurance policy

    NOTE: the deed gets recorded and only shows the name of the trust and the name and address of the temporary trustee. Since placing a home in a Trust does not cause the "Do on Sale" clause to be actionable, no one is the wiser that the property has legally changed hands. Since your name and address are not tied to anything publicly recorded, your asset is hidden from public view thereby reducing the possibility of a future law suit against you should someone feel they have cause to do so.  Also, in the event you are sued your other assets are all in separate LLCs and are insulated from any possible judgment coming from the litigation.

    I would appreciate it if some of you wise old owls could check my understanding of the process and fill in any blanks I may have in my understanding of it.
  • 11 Oct 2016 9:27 PM
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    Reply # 4301442 on 4301157
    Deleted user

    Sounds like you just came from a seminar. 


    Why are you trying to hide anything from the lender?  I have several sub2 deals in which I place in a land trust with a partner as trustee and my company as beneficiary.  On all my deals I immediately call the lender email them a 3rd Party Agreement and POA and instruct them that I will be making payments from now on.  I have yet to have a lender reject my payment or consider calling the note due.  I immediately cancel their insurance policy and place my own on property which names them as an additional party.

    Don't complicate things and don't try to be sneaky.

    Best of Luck!
  • 11 Oct 2016 10:19 PM
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    Reply # 4301472 on 4301157
    Robin Carriger (Administrator)

    Disclaimer:  I'm not an attorney, and I'm not offering legal advice.  This is only my opinion.

    The wrinkle on Rocky's method of actually calling the lender holding the underlying note to tell them what he's doing is something I've never heard.  I wouldn't dream of contacting the lender holding the underlying note, but it illustrates an interesting, higher level point.  Most lenders, with a notable exception or two, don't seem to care what you do as long as they're insured and somebody keeps making the payments.  They will never give their explicit permission for a Sub2 deal, so you shouldn't ask, but you can usually get the deal done anyway.

    The variation of a Sub2 deal you described sounds like it would work, but I think a lender who really wanted to take action could come after the house in a foreclosure if they chose to take a hard look at the structure of your deal.

    The Garn-St. Germain Depository Institutions Act of 1982 is what many Sub2 investors think protects them against the lender being able to call the note due and payable via the due-on-sale clause.  It states that "... a lender may not exercise its option pursuant to a due-on-sale clause upon ... a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”

    Many Sub2 deals don't include the Sub2 seller remaining as a beneficiary, and the seller is almost always expected to move out as part of the deal.  Furthermore, having the right kind of trust is important for the protection needed in a Sub2 deal.  Notice that Garn-St. Germain said that the trust should be an inter vivos trust.  I think a lot of people use just any old trust which I suspect would leave them with little or no protection if a legal challenge were raised.

    So... it seems to me that, if you're concerned with rock solid legal protection, you'd want to have a much more detailed agreement that keeps the seller as a minority beneficiary, describes how a rent/sale decision will be made for the property, and uses the right kind of trust.

    I highly recommend that anybody reading this consult an experienced Real Estate attorney before pursuing a Sub2 deal.  There's actually a lot more to it than has  yet been mentioned here.

    Thanks,

    Robin

    Last modified: 11 Oct 2016 10:24 PM | Robin Carriger (Administrator)
  • 12 Oct 2016 8:44 AM
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    Reply # 4302093 on 4301157
    Deleted user

    Thank you both for taking the time to give your advice and perspectives.

    So, for rock solid legal footing, it needs to be a living trust not a land trust and the person on the note needs to retain some level of beneficiary rights and right to occupancy. Hmmm! Well, retaining them with an insignificant fractional percentage of beneficiary rights would meet that requirement I guess. But I'm not sure how you get around the right to occupancy part of it.

    I don't mind paying an attorney to walk me through the process but I want to come away from the table with the knowledge, state filing forms, contracts, and complete understanding of the risks, protections, etc. involved in doing this kind of transaction. I do not want to have to go back to the attorney each time I have a new deal. I want to be able to have a reliable Title company double check my due diligence on outstanding liens and be confident enough to close on a kitchen table after sitting down with the attorney and paying his legal fee.

    When I contacted Milt on the phone he discouraged the use of a land trust. Other online SUB-2 experts of course highly recommend using land trusts for this purpose. Also, many online info sources go out of their way to state that Trusts are entities which most attorneys don't even understand. So, there is significant amounts of conflicting information on the legalities and best methods to structure these type deals.

    Anyway, I am just trying to make sure I understand the process as well as someone without a legal background can, and understand the risks and protections as best I can before choosing a method.

    I am leaning towards purchasing a document package online for $300-400 that has all the legal forms required. POA with correct wording, purchase contract, trust forms, trustee deed.

    Any further advice on the fastest most economical method to gain the knowledge and materials I need to be able to do these type deals?

    Last modified: 12 Oct 2016 9:06 AM | Deleted user
  • 12 Oct 2016 8:52 AM
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    Reply # 4302111 on 4301157
    Deleted user

    Rockne, go to http://www.lonestarlandlaw.com/subject-to-transactions.html for additional information on TX sub2 deals.
  • 12 Oct 2016 11:02 AM
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    Reply # 4302290 on 4301157
    Deleted user

    Thanks Rocky,

    Residential “subject to” addendum to TREC contract: $225 template, $275 custom

    Residential “subject to” agreement: $225 template, $275 custom

    Residential “subject to” warranty deed: $225 template, $275 custom

    Residential “subject to” template package (the above three items): $550


    So, did you purchase your Trust forms and S2 forms from this site?

    When would you use a warranty deed?

    Isn't it just a trustee deed that is used to convey ownership to the trust, or is this the instrument used for that purpose?
  • 12 Oct 2016 3:59 PM
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    Reply # 4302863 on 4301157
    Deleted user

    Does this look like a reasonable addendum to add to the TREC 20-13 RESALE contract for a Subject 2 deal?

    http://www.loveamericanhomes.com/appendixbasic_files/10_Subject_To_Financing_Addendum.pdf
  • 12 Oct 2016 11:09 PM
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    Reply # 4303308 on 4301157
    Robin Carriger (Administrator)

    Rockne,

    I have not, and I will not offer you any legal advice.  However, if you'd like to give me a call at 817-300-1132, I'll be happy to share some of my personal experiences and opinions with you.  This is a HUGE topic, and there are LOTS of sources of documentation.

    Thanks,

    Robin

    Last modified: 16 Oct 2016 9:11 PM | Robin Carriger (Administrator)
  • 13 Oct 2016 9:13 AM
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    Reply # 4303918 on 4301157
    Deleted user

    Rockne,

    I didn't use them for Sub2 forms but did use them for my series LLC formation.  I acquired sub2 forms from networking with other investors that have been doing this a lot longer than me.  I can not share do to legal reasons as I am not an attorney or care to be one for that matter.  I use a general warranty deed to convey property along with a lot of other forms which are not recorded.  I recently refinanced several of these homes with a commercial loan and would encourage you to seek an exit strategy within 5 years which gets previous owner out of their loan. 

    These are just my two cents and what I have actually practiced in the field.
  • 14 Oct 2016 9:14 AM
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    Reply # 4305519 on 4301157
    Tim Cook

    All

    Subect-to is a cool and powerful strategy to have in your REI toolbox.  I agree with both Rocky and Robin's comments.  In my 16 years of doing and teaching Subject-to deals and not having a loan called due (SO FAR), I attribute that to alot of education, attention to detail, legal counsel, and systemizing my processes. I have people ask all the time for help, forms, etc, and my first two questions are: how many classes have you taken on Subject-to and how many Subject-to deals have you completed?  The answer is typically ZERO and ZERO.  Then my answer is don't do the deal and go partner with someone that has experience and let them help you.

    As Robin mentioned, this is not a few minutes conversation.  This is a very detailed transaction / class that you need to take to get educated.  Anyone can fill out paperwork however, can you explain it to your sellers so they truly understand what they are about to do and the risks?  Can you implement correctly to ensure success?  Do you understand the insurance piece, explain it to the buyers and sellers, do you know what to do if there is a mishap such as a fire?  What will you do if your new buyer stops paying, etc. etc. etc.

    There is alot of moving parts / details to these type of transactions.  If you are in this business to take care of sellers, take care of your new buyers, and if you want to sleep well, you need to know and understand it BEFORE you do it.

    Thats my two cents for what it's worth.

    Tim

    housebuyer@IBuyNorthTexasHomes.com
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