Posted by Charity on December 09, 2000 at 21:00:30:
Thanks for the input. I don’t think I would like to idea either. My plans would probably be to sell fast or L/O worst case. I just couldn’t see leaving my credit out there forever if I were the seller…
Charity
Question about LeGrand and subject-to deals - Posted by Charity
Posted by Charity on December 09, 2000 at 20:34:52:
In LeGrand’s FSBO course, I was re-reading some of the audio transcript and had a question. It is in regards to Example 2 at the very beginning (for those of you following along at home!) He takes over the loan subject to and then basically sells it again to another buyer. Meanwhile, the seller has moved on, and of course knows the loan is still in his name. What if the new buyer fails to make payments? Does that mean the seller is basically at risk until the loan is paid off? Do sellers do this?
When I thought of doing a subject to deal, I was thinking more people took over the payments and then maybe Lease Purchased it to a new T/B. Is that not wise? Is it better to basically re-sell it?
I guess my main question is how do the sellers typically feel about their credit and name being out there with some other buyer? I know they are normally in pretty bad straits to do this anyway, but I just wonder how you guys explain this to them…
Charity
Re: Question about LeGrand and subject-to deals - Posted by B.L.Renfrow
Posted by B.L.Renfrow on December 10, 2000 at 10:39:07:
I never leave the “seller’s credit and name out there with some other buyer.” Yes, I have heard other investors say they just sell their beneficial interest and then they are out of the picture, but I would not feel right about leaving my generally unsophisticated sellers in that position – unless you’re utilizing the PACTrust, where it’s not an issue.
But when I take a property subject-to, I’ll either L/O to my tenant-buyer, or sell on a land contract. Either way, the payments come to me, not to the underlying loan-holder. That way, if there is ever a problem, I’ll be the first to know, and I can make sure the loan gets paid. Can you imagine how your seller would feel if you had bailed out of the deal, where the loan was still in their name, and your buyer defaulted? They would have no idea what to do.
As for how sellers feel about it, that varies. Some seem to never give it another thought once the property is out of their name, but the majority of my subject-to sellers are anxious to have the underlying loan paid off at some point. Although I carefully explain to them that I cannot and will not guarantee when that will occur, most of them keep in touch and inquire from time to time about the situation. In cases where it seems to be a major concern, I’ll either include a balloon or offer some other incentive for my buyer to refinance.
With sellers who are particularly credit-conscious, I have successfully pacified them by pointing out how they can use the lender’s 800 number or web site to monitor the status of their loan and my payments.
I do have one seller who takes that a bit far, however. She apparently monitors the underlying loan on a DAILY basis, and keeps a minutely-detailed history on her computer. I got a blistering fax from her recently, after I made a payment a few days late. Of course, it was my fault, and I apologized and acknowledged my error, but I have flagged this one as one to “encourage” my buyer to re-fi sooner rather than later, now that I know she is so obsessive about it! However, that’s the exception and not the rule with subject-to deals. I tell that story only to illustrate that sellers, while they may be desperate, don’t always disappear quietly into the background once you have solved their problem.
Brian (NY)
Stay in the middle… - Posted by TRandle
Posted by TRandle on December 10, 2000 at 08:09:50:
Charity,
I’m not sure there’s anything wrong with your suggestion. As long as you stay involved and in control of the situation so that you are able to perform on your obligations to the seller, it shouldn’t matter how you “sell” the property.
Keep the payments coming to you so that you can make the payments on the underlying loan. If allowing the seller’s loan to continue until term makes you uncomfortable, then require a balloon. Or as Jim suggested, provide serious incentives for your buyers to refinance. Again, I don’t see any problem with this as long as you perform as agreed. Good investing…
Re: Question about LeGrand and subject-to deals - Posted by Marty Weisberg
Posted by Marty Weisberg on December 10, 2000 at 07:43:09:
Charity,
I guess your innocent post created quite a stir.
In the scenario you painted, if you were to use a PACTrust and sell your beneficiary interest to another, you would not compromise your Seller’s interest. The reason is that the Seller’s interest is protected no matter who the other beneficiaries are. You have a third party management company and trustee looking after the interests of all involved.
Marty
Re: Question about LeGrand and subject-to deals - Posted by Jim IL
Posted by Jim IL on December 10, 2000 at 03:48:07:
Charity,
Please forgive my rantings below, this clown got on my nerves.
But, to answer your post a little better, let me tell you I have bought a few homes “Subject to” and sold them several different ways.
But, I have never sold to someone and just assigned away my beneficial interest in the trust.
I’d say that on 90% or more I L/O the homes out, and then the seller (original seller that is) was relieved of the loan on their credit when the T/B’er exercised.
On ONE deal, I did leave the loan in place for 18 months, but I did a sale “Subject to” with my buyer, and carried a second at 14% interest.
The buyer refied after 3 months, because the HIGH interest rate on my second made them realize QUICKLY that they could save money by refi’ing.
I only did this because the buyer was self employed, and needed to actually own the home to refi.
After the 3 months I referred them to a friend who was a mortgage broker, and he did the loan and paid me a fee for the referral.
HTH,
Jim IL
Re: Question about LeGrand and subject-to deals - Posted by Geoffrey Faivre-Malloy
Posted by Geoffrey Faivre-Malloy on December 09, 2000 at 21:45:41:
7 years ago I was making less than $500 per month. I was behind on all of my bills and eventually filed for bankruptcy. If I were in the situation where I had a house at that time (even if I were making a bit more) and someone had come along and offered to take the house, I would have done it. At that point, my credit was fried. There really wasn’t any thing worse that I could do to my credit.
So, I can understand how some desperate sellers would do this.
Just my thoughts on the matter…
G-Man
P.S. Having said that, I don’t know if I’ll be doing this myself. I feel more comfortable with the lease option. I’ll have to do some serious thinking about this. 
Re: Question about LeGrand and subject-to deals - Posted by dewCO
Posted by dewCO on December 09, 2000 at 20:55:34:
Kind of a risky way to go. I hadn’t listened to his tapes in years, forgot that was in there. I suppose if you disclosed it to the owner who lets you have it, it might be OK, but I wouldn’t go that route. My reputation would be at stake. I would dispose of it like you say, either just sell it, or LO before selling it.
Re: Question about LeGrand and subject-to deals - Posted by Keith (AL)
Posted by Keith (AL) on December 10, 2000 at 11:20:11:
Good response to the original question. I would only add a few ideas that I’ve incorporated into similar situations.
I try to pasify the Seller by reminding him/her that if I am late on an underlying loan that they are the first to know because they receive a notice from the lender that the payment is late. If I’m late, I pay them an excessive late payment penalty (I’m never late so this helps calm them). And if I miss a payment by 30 days the contract has defaulted and the Seller gets his/her house back PLUS any down payment and principal I’ve paid.
I usually use a balloon payment to the Seller (7 - 10 years) so that they don’t have to spend 20+ years looking over their shoulder.
On the Buyer side, I am very strict with my Buyers. 10 day grace period (the underlying loans are usually 16 days). Payments due on the 25th day of the previous month (the underlying loans are usually due on the 1st).
I set a relatively high interest rate and a short balloon (generally 2 years) in the land contract with a Buyer. The high interest rate is incentive to find third party funding as soon as possible. The 2 years gives them plenty of time to clean up their credit and provide proof of ability to make payments (seasoning). I also encourage them to use my Broker to help give them a check-list of things to do so they can be financed as soon as possible. The Broker lets me know if they have been following through.
Finally when doing Subject To deals the contracts must be well written and cover almost any possible situation. It is imperitive that you utilize an attorney to develop contracts which suit your specific needs. I’ve been very fortunate to have an attorney that has spent a great deal of time (for free) helping me get sound land contracts together. In return for the free help, I bring ALL of my closings, especially land contract closings, to him. It costs more to have an attorney notarize the contracts but it is more than worth it. It also gives the other party (Buyer/Seller) a chance to ask an attorney any last questions they may have.