Having A Good Lawyer For Your Subject-To Deals
By now you know that Real Estate Investing is a hot business. There is a lot of talk about people who have made a lot of money in the Real Estate business.
There is a lot of money that can be made by buying and selling properties, but there are some important things that you need to understand before venturing into this as a business.
One of the first things you should know is that although we feel that Subject-To deals are “easy” in relation to other strategies, you have to understand that, like any transaction, there can be complications. You need to first understand the market in the area that you are considering purchasing the houses such as what type of homes sells best in that area, including the bad areas of the town and the good.
You should also investigate the crime rates and the total population. One other huge factor to be aware of is who the major job providers are in the area! By answering some of these questions you can determine if having a real estate investing business in the area you’re looking at is a wise decision or not.
While demographics are always important when it comes to buying and selling real estate, the truth is when it comes to subject-to deals if you can find someone who wants to live in the house and can afford the down payment and the monthly payment, you can more than likely sell the house, even in the worse neighborhoods.
Possible Risks When Doing Subject-To Deals
Real estate investing can be a way to make a large sum of money quickly but it can also be lot of hard work. It is not one of those “get rich quick” type of businesses, however it can be home-based business. The honest truth is this, the amount of money you make will be determined by you … and the amount of time, energy and resources you put into it. If you want your business to pay off, treat it like a business.
All Real Estate Transactions Have Risks
One of the reasons subject-to transactions are so attractive to a lot of investors is because there is not a lot of risk involved.
The Due On Sale Clause -An Accelerated Note Will Require You To Pay The Loan In Full In 30 Days
Almost all mortgages have a “due-on-sale” clause that allows the lender to accelerate the loan, calling for immediate pay-off if they discover that the seller has passed ownership of the property to someone else. If the lender discovers the transfer, they may call the loan due, requiring the loan to be paid in full in 30 days. It’s been our experience that lenders aren’t very concerned about where the payment is coming from, so long as they receive payment, but it’s important to know that is not always the case.
The REI Rockstars standard practice is to inform the bank of the transaction giving the bank the opportunity to object to the sale before we close. I mention this in this particular article because we’re talking about having a good lawyer to keep you legally compliant. I tend to especially love the lawyers who go above and beyond the normal scope of protection for not just us, but also for the buyers and sellers we are working with so that we can avoid legal complications down the road. (This reminds me of 2 familiar statements: It’s always best to do the right thing and it’s better to be safe then sorry!)
There are additional protections you can put in place, but I’m not an attorney and so I’m going to leave the legal advice to those who are licensed! I will just add one more thing and that is I feel it is very important to us to protect ourselves and the buyers and sellers in these transactions from a situation in which a lender decides to call a note due (even though this has proven to be incredibly rare in the thousands of transactions done over the years).
The Importance of A Title Search In All Subject-To Transactions
Remember, when buying a house Subject-To, you will have the obligations to satisfy all liens and burdens before you can sell the property to another buyer; so make sure to do a title search. You may be told that there is only a first mortgage; but once you dig in, you could find much more. Generally speaking, when your obligation to pay is greater than the profit you will make on the deal, it just won’t be worth your time. I say generally, because the more creative you are with these deals, the greater chance of making just about any deal work.
Why It Is Important to Have A Lawyer Who Is Familiar With Doing Subject-To Deals
Subject-To deals do not involve a lot of risk to you the real estate investor compared to other types of creative real estate transactions, such as flipping or rehabbing. With Subject-To deals it is important to create a good relationship with a lawyer. You need to make sure that your contracts are solid and will hold up if the bank decides to call the loan immediately due. If this transaction is done poorly the seller as well as your buyer will have a lot of risk. If done properly and through an experienced lawyer it will reduce the amount of risk to all parties.
I can’t emphasize this point enough, so here are 5 power tips when hiring the right lawyer:
Five Power Tips To Know When Hiring the Right Lawyer
Find out if the lawyer has experience with the type of investing you are interested in doing. Just because they specialize in real estate investing doesn’t mean they understand the ins and outs of Subject-To investing!! Do your research when hiring a lawyer and find someone who specializes in these types of transactions and knows the current laws coming out that change the ways we can do these deals.
The fees will vary depending on a lawyer’s background, so you need to know what’s in store. You don’t want to hire an attorney late in the game because then you’ll be in trouble and you are not going to be able to afford them. It’s always best to be proactive and keep yourself out of trouble!
Trust your gut! Do not go with a lawyer that you are not comfortable with. This holds true with their fees as well. Do not give your lawyer a blank retainer check. Get an estimate up front and don’t let them get out of control.
Use your instincts. Only use lawyers you feel you trust and always seek out second and third opinions. It’s interesting that many attorneys (like doctors) will give you different answers and you need to use your instincts and brain power to differentiate between the ones who really make sense or who perhaps didn’t do enough research to give you the best answer. This is certainly the case if you are finding a lawyer to handle business or professional matters.
No matter the legal matter you end up in, it’s best to be prepared and stay professional. That is exactly why you need lawyers to work the systems for you. Keep all of your files and communications so that you can back up and prove anything that is brought against you. Remember this information as you work with a lawyer and prepare your case.
How to Build Trust With Your Subject-To Seller
Entering into a Subject-To real estate contract requires a high level of trust – we like to call Subject-To deals “trust based transactions”. If an investor starts making mortgage payments late, or doesn’t make the payment at all, the seller who is still liable on the loan will end up in default and if the loan isn’t caught up, it can possibly lead to a foreclosure. The integrity that the homeowner counted on for making payments is then lost. Full disclosure about the entire transaction in writing will help you to avoid any potential risks so that all parties know what recourse they have when payments are not being made. To avoid these conflicts and loss of integrity, it’s always best to create an escrow account that holds a few payments in case you hit rough times or you’re having to remove an existing owner from a wrap around mortgage.
Avoid Doing A Subject-To Deal Where the Seller Is Declaring Bankruptcy
If your seller plans to file bankruptcy, proceed with caution or better yet don’t proceed at all without consulting an experienced lawyer. Make sure you check out our Legal Corner for more information on how to find legal advice in your area.
If you’d like to learn more about building passive income by buying and selling real estate for a profit with no money down using strategies like Subject-To and wrap around mortgages, then check out our very affordable REI Rockstars Back Stage Access Coaching Series for both new and seasoned investors!
If you prefer not to stay in the middle of transactions and simply want to sell your contracts for a quick fee, then you’ll want to learn more about how to do mortgage assignments and wholesaling, and we teach that in our coaching series as well! For under $100/mth, you’ll learn Four (4) No Money Down Real Estate Investing Strategies so that you can better evaluate the deals you come across in order to make maximum profit!