SUB TO IS ILLEGAL
So I presented John Locke's Sub To presentation to a motivated seller and we had agreed on me taking over the payments for $500... There is about $5000 in equity... Not bad, right?
Well, I left it with them to talk to their lawyer about it because they never heard of this type of purchase before (which is normal)... Anyway - they came back and said that their lawyer told them that doing this would be illegal because their mortgage has a DOS clause in it. If it is sold they would be responsible for paying off the loan. This got the sellers freaked out and now I lost a deal because of a close minded/stupid lawyer...
Has this happened to anybody before?? The DOS clause is an option for the bank to call the note due - its not mandatory...
What's going on here??
[addsig]
Subject to is not a criminal offense. A due on sale clause that is broken would at worst result in civil liability, not criminal. I have lost tonnes of deals because lawyers do not have a clue.
I live in NY where it is next to impossible to flip properties to a retailer because lawyers will not let the closing happen when they see that you have sold the property before your own closing.
Lawyers only learn the basics at school. Therefore they end up learning what is going on in the real world when they go to work for a legal company. However, legal companies, and lawyers in particular, are arrogant and stubborn and believe they know it all, and are closed minded when it comes to working creatively.
Go try tell your seller's lawyer that subject to is not a criminal offense!!
YOu could always try and get them to transfer the property to an LLC and you buy the LLC. Wouldn't even have to do a closing there.
There are alway exeptions of course but we all know this : What's 50 lawyers at the bottom of the ocean ?...... a good start!
Once a seller starts talking about their lawyer you might as well move on to the next deal. There's plenty of deals out there so why waste your time on an uncooperatvie seller? 9 out of 10 lawyers will mess up a deal. For 2 reasons : they don't know any better and they don't make a buck of the deal. Those that do know better....will get the deal themselves.
Good luck
With due respect to the lawyer bashers, it may be that the prospective seller misquoted the lawyer. The lawyer may have just told the seller that the DOS clause gave the lender the option to call the loan if the lender discovered the sub to transaction. That correct advice, without any allegation of illegality, might cause the seller to use the word "illegality" even if the lawyer did not..
The DOS clause does give the lender an option to call the loan if the sub to transaction comes to light, and this is the reason why some suggest that you take pains to keep the original lender in the dark and to protect the buyer in case the loan is called. One such idea I read about involved forming a trust with the seller's name in it (so the lender thinks it is just an estate planning move) but with the buyer's LLC as beneficiary (so the buyer can walk away unscathed if the lender calls the loan). This is a great idea for trying to keep the real effect of the transaction secret from the lender, and it protects the buyer, but it still leaves the seller at risk. Any lawyer who understands anything about sub to sales would want to advise a seller client of the risk.
Not every deal which is risk free and good for buyers is risk free and good for the sellers in the same transaction. The lawyer representing the seller has no duty to make sure a buyer's proposed sub to transaction is accepted. The lawyer's duty is to advise the seller client of the true risks associated with the proposed transaction. This may or may not scare the seller away.
good post,
thanks :-D
Simply explain the DOS to them again. Let them know that your offer still stands. If things change, and their attorney hasn't made an acceptable offer on their house, that you'd be happy to based on your original offer. You could find an attorney with an opinion closer to yours to write a letter explaining the DOS a little better, or refer them to
http://www.legalwiz.com/dueonsale.htm
This is by William Bronchick, An Attorney and Author.
Good luck,
Jeff
If you are going to pass this deal on to someone else, you can do so, in what would be called a pass throug closing. You would not be charged closing costs twice only the end buyer pays. It may be difficult to find an attorney that is willing to do it, but they are out there.
What do you guys think of the idea of "planting a seed" with the homeowners regarding the DOS clause to begin with? Explaining that it is not a big deal at all and that we (the investor) have the resources to refi (or whatever) if in fact the DOS clause is invoked. Then if they mention going to attorney, you will have already brought up the issue explaining what the attorney will most likely say. What do you guys think?
Suntzu18
suntzu,
I bring up the DOS, Don't make it a big deal. In reality it isn't. This guy's attorney obviously isn't a RE attorney, so I couldn't have anticipated that his opinion would have been so backward.
For those of you that are just starting out and/or have never done a Sub2 deal, don't get stuck on the DOS. Be aware of it, protect your self, but don't fixate on it.
Your biggest liability is with SELLERS REMOURSE. If you take a property Sub2 and then the sellers want it back, you have got MUCHO PROBLEMO's. Not only do you have to deal with them and their attorney, but now you may have a problem with your current tenants and that is DOUBLE TROUBLE.
Besides, you shouldn't be trying to convince anyone to do Sub2, they should be convincing you to buy their house and Sub2 is the only way you will do it.
Put up your signs and wait for calls, DON’T CALL ANYONE and SPRING this on them. No FSBO’s or vacant properties, not until you are seasoned and you understand the real risk involved.
I am curious to know how many of the experienced Sub2 investors have actually had instances where the lender has actually forced the DOS if they became aware of it? Also, if you have had a lender force the DOS, how did you deal with it and what happened ultimately? I feel this feedback will be a great teacher for all. Thanks, in advance, for your input.
I'm just a newbie, but I think what my mortgage broker told me about the DOS clauses may be of some help here.
The bank/lender sells you a FR mortgage that will remain fixed for the duration of the loan. Let's suppose you get a loan at 6% for 30 years. If 5 years from now, the rates are back up to 9%. At this point in time, the note holder is actually holding a note that isn't nearly as valuable as other loans that are generating more interest income. As a result, the note holder is going to look for anything they can to reinvest their money at a higher rate of return. Hence, the DOS. On the otherhand, had you purchased your property at 12%, the note holder isn't concerned about your sub 2 when rates are currently around 6%.
Again, I'm just a newbie, but this is info my mortgage broker shared with me.
HTH,
Robert
[addsig]
robertt, Funny you should mention that. I was talking to my father who was a banker for 30 years. He said the same thing that your mortage broker said. That is, as soon as the rates start heading north that banks will have incentive to call the lower rate loans. Makes sense to me. Mabye john could give us his view on this.
LittleHunter,
It takes a little more than guess work about what is going to happen with interest rates.
So let's take a look at the last 10 years of fluctuation in the interest rates.
The overall interest rate spread has only been 1.48%. I do not see this as a motivational factor for a lender to call a performing loan.
However, I do not teach buy and hold, I feel that the investors buyer should refinance in 2 years thereby giving the subject to investor the ability to get in and out of the deal within a reasonable time frame.
John $Cash$ Locke