It's been discussed ad nauseum but in a nutshell, there is a contractual clause called the due on sale contract, in which the lender has the right to accelerate (demand immediate payoff) on a loan if the collateral securing that loan is sold, transferred or otherwise changed from the original contractual terms. Some people think that to buy subject to, since this by definition, triggers the due on sale clause, is illegal. It's not, but you must be prepared in the event that the lender exersises it's option, just like you must be prepared if a T/B exersises their option.
I can't speak for others, but whenever I am asked to hide or conceal a relavent fact from a party to a transaction, my initial assumption is that this activity is illegal or unethical and, therefore, something I should avoid at all cost. In addition, state laws, especially in Georgia, are becoming very strict when it comes to hiding information from parties in a real estate transaction (e.g., the seller's disclosure form).
Maybe I'm a little too cautious at times. During a divorce, I spent way too much time in a courtroom, and I do everything I can to avoid returning, especially if it could cost me money or my freedom. I don't like to take unnecessary chances with either one.
On the other hand, all of my research is showing that subject-to is only risky if one does not have a satisfactory exit strategy if/when the bank calls the loan due, but I have not found anything that proves subject-to transactions are illegal or unethical. On the contrary, the HUD-1 Settlement Statement appears to indicate that this strategy is a respectable and legitimate investing technique.
I'd agree with that statement too, Scott. However, I don't know exactly what you mean when you say that in a sub2 deal you "hide or conceal" something from the lender. What is it that you believe that you must hide from the lender. I'm just trying to get specifics here.
As far as illegal or unethical goes with sub2, you won't find it. As you've figured out, sub2 is perfectly legal though there are those that would try to convince you otherwise. These are usually people that don't understand or comprehend the method and so "assume" that it MUST be illegal because they can't figure out why it would work.
I would say that when most people bring this up they confuse not offering information with hiding information. If they ask if you are the current owner, you have to tell them. If they don't ask, you don't. I don't believe there is anything I have seen that says you must notify lender of change of ownership, but I could be wrong.
excuse me investors but i thought when you sub-2 that you become the owner of the property just not the owner of the ****Must Reach Senior Investor status before posting URL's***hat is in recorded contract so who are you hiding info. from if the lender wants to know who is making out the check he can look at the nane on it but he is only concerned with performing inventory, keeps him looking good
just my thoughts robert
Chanty - there is nothng illegal in buying a property subject to existing loans - BUT
almost all modern loans from typical big lenders have a clause that says that if the borrower sells the property the loan comes due.
Which is to say they dont want the property sold subject to - and reserve the right to call the complete balance of the loan if they catch someone doing it.
Someone will no doubt point out that frequently they dont exercise that option.
There are attorneys who wont help you do a subject to deal.
While it is not illegal, there are some who suspect thtat to teach other people how to get around the provisions of their loans, may be a conspiracy to defraud.
To my knowledge no one has been charged this way - yet.
A somewhat conventional way to buy subject to is to do it openly with the intent of selling the property before the holder of the first gets around to noticing. In this case you dont hide anything and I dont think anyone could suggest that it was illegal, provided you didnt make a business of teaching other people how to do it.
I'll respond to you Dick, I know that it'll please you.
IF chantynicole is referring to those who suggest that the sub2 investor have the seller setup a landtrust for "estate planning purposes" in order to try to hide the change of title from the lender, then I would agree with you that this is an unethical practice and should be frowned upon. However, I see no reason to try to hide the fact from the lender. As someone already pointed out, the deed will be recorded in public records, which the lender can view, and the checks will have the new owner's name IF the lender wants to look.
Now, IF you, after your the new owner, wants to put the property in a landtrust, that's your business (though an extra, and likely unnecessary expense, IMO).
And you're right, I'll point out that frequently, lenders will not choose to exercise their option of calling the note. Why spend the money to foreclose a performing note?
That said, a lender not choosing to call the note initially doesn't give up their right to call the note. As the investor, one should be prepared for the possibility of it being called, however remote that may seem. Of course, as the owner of the property, it is much easier to get refinanced than purchase loan.
Yes, some attorneys won't do sub2 deals. Lawyers are not Gods, nor do they know all laws about all things. Frequently, attorneys unwilling to do sub2 closings are in 2 catagories: those that don't understand the legalities of the deal, and those that are stuck in a conventional mindset. In alot of cases, those attorneys who have turned down sub2 closings were not real estateattorneys in the first place.
Chanty.....once again like everyone here has said, doing a sub2 deal is not illegal. There are certain provisions that state in loan docs that if the title is transferred, a lender has the right to call a note due/accelerate the mortgage. But, and I say that with a BIG BUT!! A borrower can change title if they are placing the property in a Land Trust (which states also is in lending guidelines)
If your seller places the property in a Land Trust, and you are the owner of that trust, you are once again (not doing anything illegal) a seller can transfer/assign that trust over to you.
That would be the road to go down if doing a sub2 deal. Just put the property in a Land Trust and have the seller assign his/her interest over to you and you now own the property/Land Trust and the lender can not get upset. Land Trust are usually set up for estate planning purposes, and thats why it is ok to put a property in one.
Thank you for proving the what dickknox pointed out and I agreed with.
While sub2 investing is not illegal, coaching a seller on how to "hide" the sell from the lender by setting up a land trust for "estate planning purposes" (interesting how you always put a smiley face beside this remark) could very well be construed as illegal.
It's exactly this kind of half-baked advice that will eventually get someone in legal trouble and start a new round of lender guidelines/codes and/or more lending laws enacted that will further hinder the real investors.
I'm new to all of this and I have many questions. Most of them have to do with specific steps required to complete a subject-to transaction and to prevent the lender from calling the mortgage due. Here are some of the many questions I have. These specifically are related to why I made my earlier statement:
1. If I need to discuss the mortgage with the lender for any reason, what should I say if they ask me who I am and why I want to know about Mr and Mrs Seller's mortgage?
2. Should I explain to the seller that the lender has the option to call the loan due if they find out about the sale of this property?
3. Should I do anything to discourage the sellers from telling the lender about the sale of their home?
4. Should I get a new insurance policy and put it in my name, or just leave the insurance policy in the seller's name?
5. Should I use a land trust to make a subject-to purchase?
1. There is no need to contact anyone personally at the bank that holds the note. All you need is the current mortgage balance, which can be found on the last statement or by calling up the bank's automaded phone line. IF you need to talk with the lender for other reasons, like back payments, etc. I'd let the seller call and work it out. IF you must talk to them, AND they ask your interest, I'd tell them that I'm considering buying the property and wanted to know the full balance due. No need to mention that "Oh by the way, the loan will stay in place, but I won't be formerly assuming it." There is a difference between lying and just not offering every bit of info to the lender.
2. YES, the seller needs to be fully aware of where they stand in this situation. In fact, make this fact VERY clear in the agreement that you sign. This rarely changes the seller's mind about doing it this way, but they do need to know the possible problems that could arise. Besides the seller, your end buyer, if going thru some type of owner financing should be made aware of the setup as well.
3. Other than saying the above I don't think it would be necessary. You could also point out that while lenders will generally not call a performing note, they don't like to "get their noses rubbed in it" so to speak. Calling up and telling them something like, "hey we sold the property but left the loan, is this okay?" might get the property foreclosed which would be bad for their credit.
4. This is touchy here. Some teach to leave the existing insurance in place and get a power of attorney to act in place of the seller. I disagree. First, the existing insurance is likely a homeowner's policy, which would be invalid if a claim were filed, since the homeowner doesn't live there anymore. Having the homeowner switch it to a landlord/dwelling policy first and then taking it over might work, but again, I feel that it's unnecessary. I'd just get a new policy, with the lender as additional insured.
I had a property that the buyers were buying from me on a contract for deed. They got a fullblown homeowner's policy on the place, but the lender as additional and their agent sent it in OVER my policy. Never heard one peep from the lender (countrywide, wellknown for DOS foreclosing, BTW) about the DOS, etc.
5. I think I was pretty clear on this in my previous posts, but let me elaborate. Suggesting to the seller to place the property in a land trust for "estate planning" and purchasing thru it is lying, deceiving, immoral, and possibly illegal (because the land trust was setup under "false pretendences" among other things). There is simply no reason for a land trust to be setup this way (except to pad the pockets of the gurus promoting it).
Now, if you want to put the property in a land trust AFTER you get the deed, I see no problem with that.
You're not going to be able to "prevent" the lender from calling the loan. A sell occurred, and it's perfectly within their right to call it IF they so wish. You can only agree to make the payments on time everytime, and be prepared in case the lender decides to accelerate the loan. Once you own the property, getting refinanced into a new loan is much easier (and the easiest way to pay off a called note). That said, I've yet to personally know someone that has ever had a loan called because of the DOS.
Well now I guess everyone will hate me. I use the "land trust" method. Not to hide anything but to put it into a IRA. We have never used them for "Hiding ownership" no one has ever asked the question. In talking to the mortgage company we just tell them we are trying to assist someone with there problems. Mortgage company doesn't ask. They don't seem to www.care.It is just one of the cheapest ways to transfer title in my state.
Sire
Do you use your own name and have the title transferred? I take it that you must do a lot of sub2 deals, and if you did do them, I'm sure you would notify the lender that you are taking the property sub2 and will be making the payments from this point on. Is that how you do it? I'm curious to learn of other techniques on how the pro's do it.....
Also Raj you stated that "you are lying" if you set up a land trust for estate planning purposes (to deceive the bank)
Some people may feel that if you ommit something, it's just as bad as telling a lie.
By not telling the lenders that you have ownership now can be seen that you are not being honest with them.
At least thats what I thought was suppose to happen when title is transferred (you have to notify the lender) and if you don't, that can be construed as a lie.
I guess it is a matter of what you feel is necessary to tell. It all boils down to personal preference. If you feel it's bad, it's your opinion, doesn't mean it's so.
I look at it as you are helping someone out that may need it, and not trying to commit murder.
The IRS can look at ommiting certain income as a bad thing.....
If you would have taken the time to read my last post, you would have seen that your questions and comments had already been answered.
You seem to think I have something against subject to investing, I don't (again as evidenced in my last post). What I have a problem with is people offering advice that could get somebody fined or jailed. Advice like coaching a seller to setup a Landtrust for "estate planning" when it is really being setup in order for you to shield the title from the lender. Not only is this lying, IF investigated and discovered, it could be conscrued as a federal crime (check my last post).
John Locke has a great course on Subject to investing. It'll tell you pretty much everything you need to know to successful perform one (and not once does it mention setting up a land trust).
You are driving 35 mph in a 25 mph zone, you are breaking the law. So you did not get caught are you going into the police station and tell them what you did or are you going to live with this? Maybe you never did this so your concience is clear. However, you could put up signs everwhere telling speeders to repent and turn themselves in if they don't get caught speeding.
The difference is when you purchase a property Subject To, you have "broken no laws", the lender has the option to call the note due. I have not found anywhere that you are required to inform the lender. I also have not found lenders triping over themselves to call notes due that are being paid on time.
The lender wants his money paid, the investors who invested their money with the lender want a return on their investment, this is the bottom line. If I am a money investor and you call a performing loan which costs $10K-15K to call and the lender tells me I don't get a check this month because they called a performing loan, how long do you think these lenders will stay in business? This is the real world not some hypothetical are you lying by not telling the lender deal.
I can only speak from expierence, after over 500+ deals and never a loan called due, one would think I must have been doing something correctly. I helped many people who needed help in one form or another by purchasing their property Subject To, so unless you have been there and done that, how can you qualify your answers to questions with any type of credibility in the area of Subject To investing?
John $Cash$ Locke
-
I just corrected a typo, changed "broken now laws" to "broken no laws"
Derrick
-[ Edited by nebulousd on Date 11/05/2003 ]
Actually Raj...when I wrote the last post, I did not switch over to the second page to notice your post, I just responded to the post on the previous page (thats why I didn't see your response)
And John, there are a lot of things that we do in life that is not noticed but by ourselves. Some things just boil down to a moral issue rather than an illegal one (like the speeding comment that you made) when doing comparisons, we should compare apples with apples and not oranges with pears.
All I said was, it boils down to the idividual on what they deem is lying or commiting fraud.
As you say, you've never heard of any lenders calling a note due.....I never heard of anyone going to jail for setting up a "Land Trust"
I will say this, I tried once explaining this whole Land Trust thing to a seller and boy did that suck. a confused mind will always say no.
At the closing table I present all the paper work and they can read it and do with it as they like. I will explain it then at the table if they ask, but people just usually sign and not really care. I'll even make copies of everything if they want it and they can read it at their new home.
Also, Raj and John....I'm not battling with you guys on this subject but this is another interesting note that I will share with you (once again a sub2 deal is in the eye of the beholder - on how you choose to set it up)
You mentioned that it does not state anything about notifying a lender regarding a transfer of ownership. Actually your words are below:
" I have not found anywhere that you are required to inform the lender."
paragraph 17 of the standard "Single Family FNMA/FHLMC UNIFORM INSTRUMENT Form 3005 9/90 Amended 8/91" which is used almost universally on one- to four-family mortgages in the U.S. Paragraph 17 reads as follows:
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
+++ END+++
The key words are "without lenders prior written consent"
That means the lender would like to know that this is taking place.
I'm not shooting down the theory of a sub 2 deal and I've done a ton myself...what I'm saying is, it's our own opinion on the deal should be structured - wether you did 50 or 500 (if it's lying or withholding info in any case)
I someone ask me how long does it take to get to Georgia from here, I could easily say "if you drive 65 mph (speed limit) you will get there in 5 hours by if you do 85 mph you will get there in in 3 1/2 hours. I'm not instructing them on breaking any laws by doing 85 mph, I'm just offering a few scenarios. It's up to them on which one to choose~
CHAPTER V--OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
PART 591--PREEMPTION OF STATE DUE-ON-SALE LAWS--Table of Contents
Sec. 591.2 Definitions.
For the purposes of this part, the following definitions apply:
(a) Assumed includes transfers of real property subject to a real
property loan by assumptions, installment land sales contracts,
wraparound loans, contracts for deed, transfers subject to the mortgage
or similar lien, and other like transfers.``Completed credit
application'' has the same meaning as completed application for credit
as provided in Sec. 202.2(f) of this title.
(b) Due-on-sale clause means a contract provision which authorizes
the lender, at its option, to declare immediately due and payable sums
secured by the lender's security instrument upon a sale of transfer of
all or any part of the real property securing the loan without the
lender's prior written consent. For purposes of this definition, a sale
or transfer means the conveyance of real property of any right, title or
interest therein, whether legal or equitable, whether voluntary or
involuntary, by outright sale, deed, installment sale contract, land
contract, contract for deed, leasehold interest with a term greater than
three years, lease-option contract or any other method of conveyance of
real property interests.
John...I never disagreed with the nature of a sub2 deal...what I did disagree with was what Raj said about how it shouldn't be structured (land trust)
Either way you do it it's still for the benefit of the homeowner. Wether through a land trust as (the legalwiz site mentioned) or no land trust.
Either way it's still transferring rights and keeping info about the transaction from the lender.
I just wanted to clarify once again "in my opinion" that was one way to avoid the dos clause for someone that may be concerned about it. (sort of like the speeding analogy)
Thanks for all of your good advice, I still love you man.....
No problem healthy rebuttals to one another are the American way, enjoyed our little back and forth. You kept it business which is the way it should be.
Just hold down the speed in school zones they are really serious about those zones.
Chanty,
It's still legal if you're noticed, it's just that the lender then has the right to call the loan due (enact the "Due on Sale" clause. That would suck, which is why you need to be able to handle such a situation. Raj makes an excellent point in that if you use the Land Trust to facilitate hiding the sale, then that could be construed as fraud. Not because you used a Land Trust, but because of the reason you used it.
Sub-to is perfectly legal and breaks NO laws as to buying real estate.
the big concern is the DOS (due on sale) clause... which simply is, if the title or deed of the house switches names from the owner to the new buyer, and the bank finds out about it, the bank has the RIGHT (not a law) to call the loan in full. will the bank do this on a loan that is active and keeping the payments on time??? most likely NO.
A land trust is simply a trust that is created to hold title of a property for the fenefit of some "beneficial" party. Any seller may put their property into a land trust without violating the due on sale clause. this is federal law. the seller merely deeds the property you are buying subject to the existing financing into a land trust naming himself as the "beneficiary" and you, the investor, as the "trustee." then, in a separate document, the seller assigns the "beneficial interests" of the land trust from himself to you. Now you are both the trustee (who controls the property) and the beneficiary (who gets all the benefits of the property). For all practical purposes and for all tax purposes, you now own the property.
now for insurance purposes make sure that the name on the policy is the new land trust that was created.
hmmm... how to make an analogy... well i can't... sorry, but i think i copied it good enuff... hehehe its not my advice, i got it from a book. makes me look smart huh??? and i havent even gotten one deal yet and i'm handin out advice!!!
Being the trustee and the beneficiary is no good. A lawyer would have a field day with you. And to protect your interest and hide who you are, one of the main reasons for the trust, you get a trustee, someone who you trust. Even though you are not the trustee, you still control what that trustee does. If there is no one who you know who you can trust, you need to start hanging out with some new people.
Burn that book[ Edited by nebulousd on Date 11/06/2003 ]
Good question, I asked the same thing once before...here's what Derrick Ali (an expert had to say about that one:
"Will I have protection if It's my LLC and I'm the trustee? I don't know why I would do that but I just want to know. I know one reason for the trust is to hide the owner, but I just want to make sure a lawyer ..."
I think you already answered your own Q….
My take is I don’t know since I would never structure a Trust in the above manner.
First of all the TRUSTEE should NEVER have BENEFICIAL INTEREST unless they are the Settlor Grantor within the trust.
Less the protective sheild of a Trust can EASILY be BROKEN by even a not too bright ATTY.
In order to sell the house YOU Direct the TRUSTEE to TERMINATE the TRUST and place the property up for sell to an approved Buyer Capable of paying off the existing mortgage and intended YOUR PROFIT.
Thank you so much, John L. for the link to the article. If I had found that first, I might have skipped my last 120 pages of reading here. I have been fairly well convinced for some time that sub2 is how I would like to start my REI career. I have been doing my diligence, and will be ordering your kit in the not-too-distant future.
I do have a question relating to this topic, though. I hold a current FL RE license. One paragraph that caught my attention in the linked article said:
Utah Rule R162-6.2.14 states "Real estate licensees have an affirmative duty to disclose in writing to buyer and sellers the existence or possible esistence of a "due-on-sale" clause in an underlying encumbrance on real property, and the potential consequences of selling or purchasing a property without obtaining the authorization of the holder of the underlying encumbrance"
Now, I realize that I am in FL, and such a statute may or may not exist here, but it does make me wonder:
As a licensed RE agent, if I am acting on my own behalf as an investor (or dealer), do I have additional disclosure requirements relating to sub2 transactions beyond those of any other investor? (Whether it be the afforementioned disclosure requirement, or any other I may have missed)
This would be a question for your Broker as they would have the final decision on any disclosures required by the State of Florida that their agents must make.
Ahh, yes. Unfortunately, my "broker" is actually a timeshare resort, and is in the infinitely limited business of quite specialized timeshare contracts. I wouldn't begin to know who to ask, and if I found them, they wouldn't begin to know how to answer.
The license is a formality at best, yet it is on record.
It's been discussed ad nauseum but in a nutshell, there is a contractual clause called the due on sale contract, in which the lender has the right to accelerate (demand immediate payoff) on a loan if the collateral securing that loan is sold, transferred or otherwise changed from the original contractual terms. Some people think that to buy subject to, since this by definition, triggers the due on sale clause, is illegal. It's not, but you must be prepared in the event that the lender exersises it's option, just like you must be prepared if a T/B exersises their option.
Good Luck,
Shawn(OH)
Hi ChantyNicole,
I was concerned about the same thing, until I found lines 203 and 503 on the HUD-1 Settlement Statement. They read...
"Existing loan(s) taken subject to"
Apparently, HUD recognizes subject-to purchases as a legitimate method of acquiring a property.
Scott
If you could elaborate as to what sounds so "borderline illegal" we could help a bit more.
Roger
Hi Roger,
I can't speak for others, but whenever I am asked to hide or conceal a relavent fact from a party to a transaction, my initial assumption is that this activity is illegal or unethical and, therefore, something I should avoid at all cost. In addition, state laws, especially in Georgia, are becoming very strict when it comes to hiding information from parties in a real estate transaction (e.g., the seller's disclosure form).
Maybe I'm a little too cautious at times. During a divorce, I spent way too much time in a courtroom, and I do everything I can to avoid returning, especially if it could cost me money or my freedom. I don't like to take unnecessary chances with either one.
On the other hand, all of my research is showing that subject-to is only risky if one does not have a satisfactory exit strategy if/when the bank calls the loan due, but I have not found anything that proves subject-to transactions are illegal or unethical. On the contrary, the HUD-1 Settlement Statement appears to indicate that this strategy is a respectable and legitimate investing technique.
Just my 2 cents...
Scott
I'd agree with that statement too, Scott. However, I don't know exactly what you mean when you say that in a sub2 deal you "hide or conceal" something from the lender. What is it that you believe that you must hide from the lender. I'm just trying to get specifics here.
As far as illegal or unethical goes with sub2, you won't find it. As you've figured out, sub2 is perfectly legal though there are those that would try to convince you otherwise. These are usually people that don't understand or comprehend the method and so "assume" that it MUST be illegal because they can't figure out why it would work.
Roger
I would say that when most people bring this up they confuse not offering information with hiding information. If they ask if you are the current owner, you have to tell them. If they don't ask, you don't. I don't believe there is anything I have seen that says you must notify lender of change of ownership, but I could be wrong.
excuse me investors but i thought when you sub-2 that you become the owner of the property just not the owner of the ****Must Reach Senior Investor status before posting URL's***hat is in recorded contract so who are you hiding info. from if the lender wants to know who is making out the check he can look at the nane on it but he is only concerned with performing inventory, keeps him looking good
just my thoughts robert
that is the loan didnt know it would do that
robert
Yes, Robert that is correct. You become the owner of the property and not the loan.
John (LV)
Chanty - there is nothng illegal in buying a property subject to existing loans - BUT
almost all modern loans from typical big lenders have a clause that says that if the borrower sells the property the loan comes due.
Which is to say they dont want the property sold subject to - and reserve the right to call the complete balance of the loan if they catch someone doing it.
Someone will no doubt point out that frequently they dont exercise that option.
There are attorneys who wont help you do a subject to deal.
While it is not illegal, there are some who suspect thtat to teach other people how to get around the provisions of their loans, may be a conspiracy to defraud.
To my knowledge no one has been charged this way - yet.
A somewhat conventional way to buy subject to is to do it openly with the intent of selling the property before the holder of the first gets around to noticing. In this case you dont hide anything and I dont think anyone could suggest that it was illegal, provided you didnt make a business of teaching other people how to do it.
I'll respond to you Dick, I know that it'll please you.
IF chantynicole is referring to those who suggest that the sub2 investor have the seller setup a landtrust for "estate planning purposes" in order to try to hide the change of title from the lender, then I would agree with you that this is an unethical practice and should be frowned upon. However, I see no reason to try to hide the fact from the lender. As someone already pointed out, the deed will be recorded in public records, which the lender can view, and the checks will have the new owner's name IF the lender wants to look.
Now, IF you, after your the new owner, wants to put the property in a landtrust, that's your business (though an extra, and likely unnecessary expense, IMO).
And you're right, I'll point out that frequently, lenders will not choose to exercise their option of calling the note. Why spend the money to foreclose a performing note?
That said, a lender not choosing to call the note initially doesn't give up their right to call the note. As the investor, one should be prepared for the possibility of it being called, however remote that may seem. Of course, as the owner of the property, it is much easier to get refinanced than purchase loan.
Yes, some attorneys won't do sub2 deals. Lawyers are not Gods, nor do they know all laws about all things. Frequently, attorneys unwilling to do sub2 closings are in 2 catagories: those that don't understand the legalities of the deal, and those that are stuck in a conventional mindset. In alot of cases, those attorneys who have turned down sub2 closings were not real estate attorneys in the first place.
So what other illegalities are we referring to?
Roger
Chanty.....once again like everyone here has said, doing a sub2 deal is not illegal. There are certain provisions that state in loan docs that if the title is transferred, a lender has the right to call a note due/accelerate the mortgage. But, and I say that with a BIG BUT!! A borrower can change title if they are placing the property in a Land Trust (which states also is in lending guidelines)
If your seller places the property in a Land Trust, and you are the owner of that trust, you are once again (not doing anything illegal) a seller can transfer/assign that trust over to you.
That would be the road to go down if doing a sub2 deal. Just put the property in a Land Trust and have the seller assign his/her interest over to you and you now own the property/Land Trust and the lender can not get upset. Land Trust are usually set up for estate planning purposes, and thats why it is ok to put a property in one.
Hope that helped~
rcummings,
Thank you for proving the what dickknox pointed out and I agreed with.
While sub2 investing is not illegal, coaching a seller on how to "hide" the sell from the lender by setting up a land trust for "estate planning purposes" (interesting how you always put a smiley face beside this remark) could very well be construed as illegal.
It's exactly this kind of half-baked advice that will eventually get someone in legal trouble and start a new round of lender guidelines/codes and/or more lending laws enacted that will further hinder the real investors.
Roger
I never really did get an answer. It is legal if you are not noticed?
Do a land trust or no land trust? Which is it now???
~chantelle
Hi Roger,
I'm new to all of this and I have many questions. Most of them have to do with specific steps required to complete a subject-to transaction and to prevent the lender from calling the mortgage due. Here are some of the many questions I have. These specifically are related to why I made my earlier statement:
1. If I need to discuss the mortgage with the lender for any reason, what should I say if they ask me who I am and why I want to know about Mr and Mrs Seller's mortgage?
2. Should I explain to the seller that the lender has the option to call the loan due if they find out about the sale of this property?
3. Should I do anything to discourage the sellers from telling the lender about the sale of their home?
4. Should I get a new insurance policy and put it in my name, or just leave the insurance policy in the seller's name?
5. Should I use a land trust to make a subject-to purchase?
Thanks,
Scott
Scott,
Here's my take on your questions.
1. There is no need to contact anyone personally at the bank that holds the note. All you need is the current mortgage balance, which can be found on the last statement or by calling up the bank's automaded phone line. IF you need to talk with the lender for other reasons, like back payments, etc. I'd let the seller call and work it out. IF you must talk to them, AND they ask your interest, I'd tell them that I'm considering buying the property and wanted to know the full balance due. No need to mention that "Oh by the way, the loan will stay in place, but I won't be formerly assuming it." There is a difference between lying and just not offering every bit of info to the lender.
2. YES, the seller needs to be fully aware of where they stand in this situation. In fact, make this fact VERY clear in the agreement that you sign. This rarely changes the seller's mind about doing it this way, but they do need to know the possible problems that could arise. Besides the seller, your end buyer, if going thru some type of owner financing should be made aware of the setup as well.
3. Other than saying the above I don't think it would be necessary. You could also point out that while lenders will generally not call a performing note, they don't like to "get their noses rubbed in it" so to speak. Calling up and telling them something like, "hey we sold the property but left the loan, is this okay?" might get the property foreclosed which would be bad for their credit.
4. This is touchy here. Some teach to leave the existing insurance in place and get a power of attorney to act in place of the seller. I disagree. First, the existing insurance is likely a homeowner's policy, which would be invalid if a claim were filed, since the homeowner doesn't live there anymore. Having the homeowner switch it to a landlord/dwelling policy first and then taking it over might work, but again, I feel that it's unnecessary. I'd just get a new policy, with the lender as additional insured.
I had a property that the buyers were buying from me on a contract for deed. They got a fullblown homeowner's policy on the place, but the lender as additional and their agent sent it in OVER my policy. Never heard one peep from the lender (countrywide, wellknown for DOS foreclosing, BTW) about the DOS, etc.
5. I think I was pretty clear on this in my previous posts, but let me elaborate. Suggesting to the seller to place the property in a land trust for "estate planning" and purchasing thru it is lying, deceiving, immoral, and possibly illegal (because the land trust was setup under "false pretendences" among other things). There is simply no reason for a land trust to be setup this way (except to pad the pockets of the gurus promoting it).
Now, if you want to put the property in a land trust AFTER you get the deed, I see no problem with that.
You're not going to be able to "prevent" the lender from calling the loan. A sell occurred, and it's perfectly within their right to call it IF they so wish. You can only agree to make the payments on time everytime, and be prepared in case the lender decides to accelerate the loan. Once you own the property, getting refinanced into a new loan is much easier (and the easiest way to pay off a called note). That said, I've yet to personally know someone that has ever had a loan called because of the DOS.
hope it helps,
Roger
Well now I guess everyone will hate me. I use the "land trust" method. Not to hide anything but to put it into a IRA. We have never used them for "Hiding ownership" no one has ever asked the question. In talking to the mortgage company we just tell them we are trying to assist someone with there problems. Mortgage company doesn't ask. They don't seem to www.care.It is just one of the cheapest ways to transfer title in my state.
Sire
ok Raj...
What would you suggest?
Do you use your own name and have the title transferred? I take it that you must do a lot of sub2 deals, and if you did do them, I'm sure you would notify the lender that you are taking the property sub2 and will be making the payments from this point on. Is that how you do it? I'm curious to learn of other techniques on how the pro's do it.....
Also Raj you stated that "you are lying" if you set up a land trust for estate planning purposes (to deceive the bank)
Some people may feel that if you ommit something, it's just as bad as telling a lie.
By not telling the lenders that you have ownership now can be seen that you are not being honest with them.
At least thats what I thought was suppose to happen when title is transferred (you have to notify the lender) and if you don't, that can be construed as a lie.
I guess it is a matter of what you feel is necessary to tell. It all boils down to personal preference. If you feel it's bad, it's your opinion, doesn't mean it's so.
I look at it as you are helping someone out that may need it, and not trying to commit murder.
The IRS can look at ommiting certain income as a bad thing.....
Mr. Cummings,
If you would have taken the time to read my last post, you would have seen that your questions and comments had already been answered.
You seem to think I have something against subject to investing, I don't (again as evidenced in my last post). What I have a problem with is people offering advice that could get somebody fined or jailed. Advice like coaching a seller to setup a Landtrust for "estate planning" when it is really being setup in order for you to shield the title from the lender. Not only is this lying, IF investigated and discovered, it could be conscrued as a federal crime (check my last post).
John Locke has a great course on Subject to investing. It'll tell you pretty much everything you need to know to successful perform one (and not once does it mention setting up a land trust).
Roger
rcummings,
You are driving 35 mph in a 25 mph zone, you are breaking the law. So you did not get caught are you going into the police station and tell them what you did or are you going to live with this? Maybe you never did this so your concience is clear. However, you could put up signs everwhere telling speeders to repent and turn themselves in if they don't get caught speeding.
The difference is when you purchase a property Subject To, you have "broken no laws", the lender has the option to call the note due. I have not found anywhere that you are required to inform the lender. I also have not found lenders triping over themselves to call notes due that are being paid on time.
The lender wants his money paid, the investors who invested their money with the lender want a return on their investment, this is the bottom line. If I am a money investor and you call a performing loan which costs $10K-15K to call and the lender tells me I don't get a check this month because they called a performing loan, how long do you think these lenders will stay in business? This is the real world not some hypothetical are you lying by not telling the lender deal.
I can only speak from expierence, after over 500+ deals and never a loan called due, one would think I must have been doing something correctly. I helped many people who needed help in one form or another by purchasing their property Subject To, so unless you have been there and done that, how can you qualify your answers to questions with any type of credibility in the area of Subject To investing?
John $Cash$ Locke
-
I just corrected a typo, changed "broken now laws" to "broken no laws"
Derrick
-[ Edited by nebulousd on Date 11/05/2003 ]
Actually Raj...when I wrote the last post, I did not switch over to the second page to notice your post, I just responded to the post on the previous page (thats why I didn't see your response)
And John, there are a lot of things that we do in life that is not noticed but by ourselves. Some things just boil down to a moral issue rather than an illegal one (like the speeding comment that you made) when doing comparisons, we should compare apples with apples and not oranges with pears.
All I said was, it boils down to the idividual on what they deem is lying or commiting fraud.
As you say, you've never heard of any lenders calling a note due.....I never heard of anyone going to jail for setting up a "Land Trust"
I will say this, I tried once explaining this whole Land Trust thing to a seller and boy did that suck. a confused mind will always say no.
At the closing table I present all the paper work and they can read it and do with it as they like. I will explain it then at the table if they ask, but people just usually sign and not really care. I'll even make copies of everything if they want it and they can read it at their new home.
Also, Raj and John....I'm not battling with you guys on this subject but this is another interesting note that I will share with you (once again a sub2 deal is in the eye of the beholder - on how you choose to set it up)
You mentioned that it does not state anything about notifying a lender regarding a transfer of ownership. Actually your words are below:
" I have not found anywhere that you are required to inform the lender."
paragraph 17 of the standard "Single Family FNMA/FHLMC UNIFORM INSTRUMENT Form 3005 9/90 Amended 8/91" which is used almost universally on one- to four-family mortgages in the U.S. Paragraph 17 reads as follows:
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
+++ END+++
The key words are "without lenders prior written consent"
That means the lender would like to know that this is taking place.
I'm not shooting down the theory of a sub 2 deal and I've done a ton myself...what I'm saying is, it's our own opinion on the deal should be structured - wether you did 50 or 500 (if it's lying or withholding info in any case)
I someone ask me how long does it take to get to Georgia from here, I could easily say "if you drive 65 mph (speed limit) you will get there in 5 hours by if you do 85 mph you will get there in in 3 1/2 hours. I'm not instructing them on breaking any laws by doing 85 mph, I'm just offering a few scenarios. It's up to them on which one to choose~
Some more info that I thought I would share:
TITLE 12--BANKS AND BANKING
CHAPTER V--OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
PART 591--PREEMPTION OF STATE DUE-ON-SALE LAWS--Table of Contents
Sec. 591.2 Definitions.
For the purposes of this part, the following definitions apply:
(a) Assumed includes transfers of real property subject to a real
property loan by assumptions, installment land sales contracts,
wraparound loans, contracts for deed, transfers subject to the mortgage
or similar lien, and other like transfers.``Completed credit
application'' has the same meaning as completed application for credit
as provided in Sec. 202.2(f) of this title.
(b) Due-on-sale clause means a contract provision which authorizes
the lender, at its option, to declare immediately due and payable sums
secured by the lender's security instrument upon a sale of transfer of
all or any part of the real property securing the loan without the
lender's prior written consent. For purposes of this definition, a sale
or transfer means the conveyance of real property of any right, title or
interest therein, whether legal or equitable, whether voluntary or
involuntary, by outright sale, deed, installment sale contract, land
contract, contract for deed, leasehold interest with a term greater than
three years, lease-option contract or any other method of conveyance of
real property interests.
rcummings,
One more time from a knowlegeable investor and an attorney for the laymen trying to practice law.
http://www.legalwiz.com/dueonsale.htm
John $Cash$ Locke
John...I never disagreed with the nature of a sub2 deal...what I did disagree with was what Raj said about how it shouldn't be structured (land trust)
Either way you do it it's still for the benefit of the homeowner. Wether through a land trust as (the legalwiz site mentioned) or no land trust.
Either way it's still transferring rights and keeping info about the transaction from the lender.
I just wanted to clarify once again "in my opinion" that was one way to avoid the dos clause for someone that may be concerned about it. (sort of like the speeding analogy)
Thanks for all of your good advice, I still love you man.....
rcummings,
No problem healthy rebuttals to one another are the American way, enjoyed our little back and forth. You kept it business which is the way it should be.
Just hold down the speed in school zones they are really serious about those zones.
Till me meet again,
John $Cash$ Locke
He shoots......and he scores, and the crowd goes wild.
I'm glad that one is over, I don't know about you guys, but I had no clue as to how that one was going to end.
great post and I hope we all learned something....don't let that super star status hold you back, if you got something to say get it off your chest.
I love you guys....good night!
Chanty,
It's still legal if you're noticed, it's just that the lender then has the right to call the loan due (enact the "Due on Sale" clause. That would suck, which is why you need to be able to handle such a situation. Raj makes an excellent point in that if you use the Land Trust to facilitate hiding the sale, then that could be construed as fraud. Not because you used a Land Trust, but because of the reason you used it.
whoops...i guess i was a bit late with that post. i was responding to the end of the first page without realizing there were 3 pages. sorry.
hey chanty
Sub-to is perfectly legal and breaks NO laws as to buying real estate.
the big concern is the DOS (due on sale) clause... which simply is, if the title or deed of the house switches names from the owner to the new buyer, and the bank finds out about it, the bank has the RIGHT (not a law) to call the loan in full. will the bank do this on a loan that is active and keeping the payments on time??? most likely NO.
A land trust is simply a trust that is created to hold title of a property for the fenefit of some "beneficial" party. Any seller may put their property into a land trust without violating the due on sale clause. this is federal law. the seller merely deeds the property you are buying subject to the existing financing into a land trust naming himself as the "beneficiary" and you, the investor, as the "trustee." then, in a separate document, the seller assigns the "beneficial interests" of the land trust from himself to you. Now you are both the trustee (who controls the property) and the beneficiary (who gets all the benefits of the property). For all practical purposes and for all tax purposes, you now own the property.
now for insurance purposes make sure that the name on the policy is the new land trust that was created.
hmmm... how to make an analogy... well i can't... sorry, but i think i copied it good enuff... hehehe its not my advice, i got it from a book. makes me look smart huh??? and i havent even gotten one deal yet and i'm handin out advice!!!
[addsig]
Bad advice at that.
Being the trustee and the beneficiary is no good. A lawyer would have a field day with you. And to protect your interest and hide who you are, one of the main reasons for the trust, you get a trustee, someone who you trust. Even though you are not the trustee, you still control what that trustee does. If there is no one who you know who you can trust, you need to start hanging out with some new people.
Burn that book[ Edited by nebulousd on Date 11/06/2003 ]
oh really!! wow good thing you clear that up for me. hehe really i dont know what i'm talking about... but lemme get it straight.
so you are the beneficiary in this situation then right? and then someone who you trust would be the trustee...
um question... lemme give you an example...
what if you were to name yourself as the beneficiary and then name your LLC as the trustee, can you do that? just a hypotheical question...
thx for the clear up.
[addsig]
Good question, I asked the same thing once before...here's what Derrick Ali (an expert had to say about that one:
"Will I have protection if It's my LLC and I'm the trustee? I don't know why I would do that but I just want to know. I know one reason for the trust is to hide the owner, but I just want to make sure a lawyer ..."
I think you already answered your own Q….
My take is I don’t know since I would never structure a Trust in the above manner.
CHaynes Wrote---
Quote:
--------------------------------------------------------------------------------
okay so what protects me, if for any reason I have a intelligent person assigned as a trustee ; how am i protected?
--------------------------------------------------------------------------------
You are a Beneficiary,
Your Beneficiary Agreement,
Your Settlor Status and/or
Your Power of Atty Plus Voting Rights
All within a BENEFICARY DIRECTED (Not Trustee-Directed) LAND TRUST Agreement
Quote:
--------------------------------------------------------------------------------
Also what is said to the seller to explain using an outsider as a trustee?
--------------------------------------------------------------------------------
NOTHING if you've got the POAtty + Majority Benefical Interest within the Trust
Quote:
--------------------------------------------------------------------------------
what i am getting is that the "Trustee" has the true power in this situation.
--------------------------------------------------------------------------------
WRONG-unless you give it to them
Quote:
--------------------------------------------------------------------------------
Does my power of attorney supersede this power?[/qoute] YES!
[qoute]If the trustee is given the beneficiary interest and the equitable interest and I sell the house what happens?
--------------------------------------------------------------------------------
First of all the TRUSTEE should NEVER have BENEFICIAL INTEREST unless they are the Settlor Grantor within the trust.
Less the protective sheild of a Trust can EASILY be BROKEN by even a not too bright ATTY.
In order to sell the house YOU Direct the TRUSTEE to TERMINATE the TRUST and place the property up for sell to an approved Buyer Capable of paying off the existing mortgage and intended YOUR PROFIT.
Make sense Yet??
I Hope it does!
Derrick Ali
[ Edited by DerrickAli on Date 10/24/2003 ]
here's the link if you want to read the entire post
http://www.thecreativeinvestor.com/modules.php?op=modload&name=Forum&file=viewtopic&topic=13837&forum=34&start=15
bottom line, get a trustee.[ Edited by nebulousd on Date 11/06/2003 ]
Thank you so much, John L. for the link to the article. If I had found that first, I might have skipped my last 120 pages of reading here. I have been fairly well convinced for some time that sub2 is how I would like to start my REI career. I have been doing my diligence, and will be ordering your kit in the not-too-distant future.
I do have a question relating to this topic, though. I hold a current FL RE license. One paragraph that caught my attention in the linked article said:
Utah Rule R162-6.2.14 states "Real estate licensees have an affirmative duty to disclose in writing to buyer and sellers the existence or possible esistence of a "due-on-sale" clause in an underlying encumbrance on real property, and the potential consequences of selling or purchasing a property without obtaining the authorization of the holder of the underlying encumbrance"
Now, I realize that I am in FL, and such a statute may or may not exist here, but it does make me wonder:
As a licensed RE agent, if I am acting on my own behalf as an investor (or dealer), do I have additional disclosure requirements relating to sub2 transactions beyond those of any other investor? (Whether it be the afforementioned disclosure requirement, or any other I may have missed)
thestudentisready,
Glad to meet you.
This would be a question for your Broker as they would have the final decision on any disclosures required by the State of Florida that their agents must make.
John $Cash$ Locke
Ahh, yes. Unfortunately, my "broker" is actually a timeshare resort, and is in the infinitely limited business of quite specialized timeshare contracts. I wouldn't begin to know who to ask, and if I found them, they wouldn't begin to know how to answer.
The license is a formality at best, yet it is on record.
Thank you for your reply.