Lease Option and “Subject To” - The Investor’s 1-2 Punch - Part 2 8
When you buy “subject to” the home seller will sign the purchase agreement,
receive any compensation the two of you have agreed upon (if any), and then sign
over title to you by way of a deed.
Why will a home seller agree to a “subject to” deal? Why would a seller
give you the deed knowing his name will remain on the mortgage loan?
The two primary reasons are "time" and "debt relief." If someone is being
transferred, divorced, buying a new home, or financially strapped -they need
immediate relief from mortgage payments. With the “subject to” tactic you can buy
the home right now, so they can move tomorrow, if necessary.
You can offer the seller instant debt relief. In other words you agree to make
all loan payments from the date the purchase agreement is signed.
Here are a few situations where a home seller will be receptive to a subject
to offer:
She is being transferred? You can buy today. The average time on the market
when selling a home in many areas is 75 days or more. That’s 2 ½ months before
a buyer is found and another 30 -60 days to close the buyer’s new loan. Time is
often the most important factor to that seller.
Often the sellers are getting divorced. They are faced with their income being
cut in half. They usually have to quickly slash expenses. The “subject to” investor
can buy their home immediately, so they can get started on their new lives.
Some are buying a new home. The investor can buy today, so they can build
tomorrow. An added feature of your “subject to offer” can be to let the sellers live
in their house while their new home is being built. No need to move twice or put
their belongings in storage. And the advantage to you is you get three months to
market that home, so when the seller moves out your tenant-buyer moves in!
Has the homeowner lost a job? They just can’t afford to wait for the home to be
sold. They are running out of savings. They need to move now and get debt
relief. You can offer them exactly what they need most – relief from mortgage
payments.
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Many sellers have little or no equity? Without the expense of getting new
financing, buying “subject to” can result in a profitable deal for you even in a
situation where there is little or no equity. Many investors specialize in no equity
deals.
Many families are overwhelmed by debt. Easy credit and credit cards have
proven to be financially fatal for many. They can’t make even one more payment.
They need the “subject to” buyer.
For reasons of their own a family just wants to move to another house? No need
for them to wait to find the perfect buyer who has the money and credit to
purchase their home. No need to deal with pretend buyers snooping through their
house, while a Realtor holds an open house. They simply deed the home over to
you and move.
The “subject to” technique can allow an investor to satisfy many needs of
motivated sellers. The key word is “motivated”. The homeowner must be facing
some urgent need to get out from under his mortgage payments or move before
you can convince them to transfer title to their home and leave the mortgage loan
in place.
By purchasing homes "subject to" you are in total control. You own the home
-the seller owns the loan. You have the deed to that property.
When you have the deed to a property there is no question who is renting,
leasing, lease/optioning or selling the home, because you OWN the property.
THE CLOSING
You must be skilled at preparing a purchase agreement and a deed.
Experienced investors often do “subject to” deals using a “kitchen table close”.
That means they are not using an escrow company or closing attorney to do the
actual title search, closing document preparation and recording. The investor
does that him or her self.
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Title searching for most deals is relatively simple, but you must understand
how to do it. If you don’t trust yourself to do the search you can buy a title report
from a local provider.
Yes, you want the home seller to sign the deed as soon as possible, but you
don’t want to record the deed until you have checked the chain of title and details
of the existing financing. If a title search turns up unexpected loans, judgments or
other liens that have been recorded against the property (undisclosed by the
seller) you may not want to complete the deal. In that case just tear up the deed
and notify the seller the deal is canceled. Your purchase agreement gives you the
right to do that if there are existing liens he did not disclose.
The legal aspects of these deals usually are so simple that getting the
papers signed and the deed recorded is all that is required. Much of the time and
expense of formal closings on ordinary deals is eaten up by the requirements of
new financing. Buying “subject to” means there is no new financing, so there are
no detail laden lender hoops to jump through.
If you want formal closings for your own peace of mind it is important to
speak with a closing officer before hand. Some do not understand “subject to”
and will not cooperate with you. Some title companies fear they create legal
liabilities for themselves and have a policy against closing “subject to” deals.
The authors made that error on their first deal. An escrow company we had
used for other deals refused to process the “subject to” deal as contracted. They
required that we do the deal as a “wrap-around”, so that the home seller would
have the power to foreclose on us if we missed payments to the lender. This
made a simple deal awkward and costly.
With the wrap-around the investor must keep track of the seller’s
whereabouts. When you are ready to pay off the loan you will need his signature
to release the wrap around contract.
In the deal mentioned it was a preforeclosure situation and we did not have
time to find a willing escrow company. We did require the seller to sign a deed
and other documents that will be held by the escrow company.
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That means that when we are ready sell the property we won’t have to hunt
for the seller. The escrow company will just record the documents they hold and
the deal will be done.
The escrow company claimed the lender, whose loan we were taking over,
might hold them responsible as a contributing party if we should default on loan
payments. We learned an important lesson. Unless there are some identifiable
complexities we do a kitchen table close.
TRUSTS
About the only way a lender would know that a borrower had sold their home
without paying off an existing loan would be if they constantly checked each deed
being recorded. What if they did that? What could you do to hide the change in
ownership?
A land trust is the common method used for hiding the name of a property
owner, whether or not it happens to be a “subject to” deal. The details of land
trusts are beyond the scope of this manual, but here is an over view.
The Garn St. Germain Act (1982) allows several exceptions in which a
lender may not enforce the "due on sale" clause. The act reads as follows:
Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real
property containing less than five dwelling units, including a lien on the stock
allocated to a dwelling unit in a cooperative housing corporation or on a
residential manufactured home, a lender may not exercise its option pursuant to
a "due on sale" clause upon:
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The creation of a lien or other encumbrance subordinate to the lender's
security instrument which does not relate to a transfer of rights of occupancy in
the property;
The creation of a purchase money security interest for household
appliances;
A transfer by devise, descent, or operation of law on the death of a joint
tenant or tenant by the entirety;
The granting of a leasehold interest of three years or less not containing an
option to purchase;
A transfer to a relative resulting from the death of a borrower;
A transfer where the spouse or children of the borrower become an owner
of the property;
A transfer resulting from a decree of a dissolution of marriage, legal
separation agreement, or from an incidental property settlement agreement, by
which the spouse of the borrower becomes an owner of the property;
A transfer into an inter-vivos trust in which the borrower is and
remains a beneficiary and that does not relate to a transfer of rights of
occupancy in the property;
Ah Ha! A land trust is a form of a revocable, living trust (inter-vivos), which
is exempted under the Garn Act. A land trust, like a living trust, is created by two
legal documents and involves three parties:
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Document #1. A trust agreement between the creator (Party #1) (called "grantor"
in legal terms) of the trust and the trustee (Party #2) that defines the trust
arrangement.
Document #2 A deed from the creator of the trust to the trustee.
The trustee holds title for the benefit of the grantor. (In this case, the grantor
is also the "beneficiary"). If you place title to your property into a land trust, you
have not violated the "due on sale" mortgage clause (so long as there is no
change in occupancy).
If you find a seller who is willing to give you title to his property and the
existing loan has a "due on sale" clause. Here's the land trust process for hiding
the transfer:
STEP 1: Ms. Seller creates a trust agreement with you as trustee of her trust. Ms
Seller is named as the "beneficiary" of the trust.
STEP 2: Ms. Seller transfers property title to the trustee (you) and there is no
violation of the "due on sale" clause.
STEP 3: Ms. Seller quietly assigns her interest (as beneficiary) under the trust to
you, the investor. This assignment is not recorded in any public record. Ms Seller
moves out and you move in.
STEP 4: You are now the beneficiary of the trust. Your newly appointed trustee
makes payments to the lender.
In Arizona (and perhaps some other states)if title is transferred to a trust the
beneficiary of a trust must be identified by name and address, although there
seems to be no penalty if the investor fails to provide that information. To
maintain anonymity the beneficial interest in the Land Trust could be a Personal
Property Trust.
Keep in mind that the assignment of Ms. Seller's beneficial interest under the
trust to the investor does trigger the "due on sale," but in most states that
assignment does not have to be recorded in the public records.
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In reality, lenders discover the transfer of an interest in real estate in one of
three ways:
Change of name on the deed, if they are checking every deed… and they are
not;
Different name on the checks sent for the monthly payment. These are received
by clerks who are highly unlikely to notice or care about the name on the check as
long as the loan number is clearly visible; or
Change of hazard insurance beneficiary. This is the most common way a lender
discovers a transfer of interest in the borrower's property.
If you notify your insurance carrier of a change in insurance beneficiary, the
lender, who is also a named beneficiary, receives a copy of the change.
If you transferred title into a land trust, the new beneficiary under the
insurance policy will be the trustee of the land trust. The lender will probably not
object, since it will assume the seller has implemented an estate-planning move.
The trust now owns the property for the benefit of the beneficiary. If the
beneficial interest of the trust is assigned (to the investor), the lender will not be
notified since the insurance beneficiary (the trustee) has not changed.
Remember that “transfers” other than a deed can trigger the “due on sale”.
A lease of three years or more -or a lease with option to purchase (of any term)
also gives the lender the power to call the loan due… if they know or care about
the violation.
Due on sale clauses are also violated when the right to occupy the property
is transferred from the seller to the investor.
In addition to “subject to” deals, land trusts are important tools for anyone
owning real estate. We suggest you do more study of land trusts before
attempting to use one. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
