security for seller in a "subject to" deal? - Posted by rayrick

Posted by JPiper on April 07, 1999 at 13:53:06:

Deeds don’t automatically revert back to someone, which was the question asked originally. You could put this in your contract, but the question would be what happens when the buyer refuses to execute? Since I’m not a lawyer I’m unable to discuss what happens next, except to say that lawsuits aren’t cheap, and don’t necessarily turn out the way that you would expect.

I would rather have a legal device that enabled me to use the laws to obtain title. One such device is the performance mortgage.


security for seller in a “subject to” deal? - Posted by rayrick

Posted by rayrick on April 07, 1999 at 10:14:03:

I have an eery feeling that this topic has been covered before, but frankly, I don’t have the time for a serious sift of the archives. My apologies.

Does anyone out there ever put a clause in your contract with a “subject to” deal that if you ever miss a couple of payments, the title reverts back to the seller? I’ve got a potential deal in the works and the sellers have said that such a clause would make them feel a lot better. I don’t really see a big downside for me with this. The only scenario I can envision where I would stop making the payments is if I have some sort of horrible tenant problem where I’m not paid for an extended period of time and where the other circumstances of my life have thrown me into financial duress. Under those circumstances, I’d probably just as soon HAVE them take back title! Thoughts or comments?

And if I may be allowed to follow-up: what do most folks out there doing “subject to” deals do when the seller wants to have their attorney go over everything? No problem? Do YOU meet with the attorney? Do you walk? The folks I’m dealing with are quite motivated, but they have a really good, long standing relationship with an attorney and automatically run EVERYTHING by him. I’m figuring that, even if this guy is a RE specialist, which he probably is not, he might be pretty buffaloed by a land trust assignment sort of deal and might need to be walked through it. I have already explained all the risks to the sellers, that is, their continued liability on the loan and the violation of the due-on-sale, so I’m not concerned about the attorney sounding an alarm on those points. Thanks all.


Re: security for seller in a “subject to” deal? - Posted by Jim Beavens

Posted by Jim Beavens on April 07, 1999 at 11:58:43:

This did come up a while ago, and I asked this same question. It was pointed out that one COULD offer to give the seller a second performance mortgage that would give them an interest in the property and the ability to foreclose if you didn’t perform, ie make the payments. However this should only be used as a last resort, because frankly you just don’t know what kind of situation you might find yourself in the future. If you go around and do this everywhere and the RE market tanks, you lose all your houses.

Some other alternatives were pointed out to try to alleviate the seller’s fears, and I’ve also come up with a few ideas of my own after listening to Bronchick’s “Cash Cow” course:

  1. Show them your credit report if it’s good.

  2. Give references of past customers, if you have any (even if they weren’t a “subject to” transaction).

  3. If you have any reserve funds (which you should) show them a copy of your bank balance showing your ability to make several payments if necessary.

  4. The idea I like best was mentioned by Bronchick in his course: offer to pay one or two thousand dollars towards the principal of the loan to show that you will have an interest in making sure the loan stays current. This is better than giving them cash, because you’ll eventually get it back in your back-end.

I haven’t yet done a “subject to” deal, but when I do find one I can do this with, it’s my goal to not give a performance mortgage for at least the first few deals to make sure I can negotiate around it, and then only when it’s a really sweet deal.

Just my opinion.

Re: security for seller - Posted by JPiper

Posted by JPiper on April 07, 1999 at 11:41:01:

You could give the seller a performance mortgage/deed of trust…upon which they could foreclose if you failed to pay the existing loan.

You could also do as Ben suggests and do a lease/option, where title stays in the owner’s name.

My feeling is that normally attorney’s are deal-killers. Afterall, if they recommend a deal that later fails, the seller is now looking at them. Same thing could be said for CPA’s. Having said this, obviously they have the right to seek outside counsel…and I don’t have a problem with this. To the extent that you are able to communicate with this advisor, explain the fine details of the transaction, this may help rather than hurt.


Thanks guys - Posted by rayrick

Posted by rayrick on April 07, 1999 at 11:32:23:

Good comments. As far as my planning to make the payments, I WILL MAKE THE PAYMENTS! So I hear ya’ on that one, Ben. I’m just trying to make the sellers feel as secure as possible and they wanted to know what would happen in this situation. As far as exit strategy, I will sell on a L/O, 2 year term, renewable for another 2 years if I have good tenants. I would prefer to get the deed rather than buy on a L/O, since I want to be able to hold the place for a good while if that’s the way things develop. Still, if their main sticking point turns out to be giving me title, I will certainly present the L/O alternative to them. Right now, it looks like they’ll go for giving me the deed.


Re: security for seller in a “subject to” deal? - Posted by Ben (IN)

Posted by Ben (IN) on April 07, 1999 at 11:19:27:

Dear Raynick,

If you are going to buy a house “subject to”, just MAKE THE PAYMENTS. No matter what!. Bad tenants, dementia, whatever, that place is your responsibility now. THe whole idea of buying subject to is getting title and taking over payments without contacting the bank. If you don’t want that responsibility, don’t buy it subject to. Use a lease-option or contract where title stays in the sellers name.

You need to straighten up a bit on what you are going to do with the house once you buy it. If you buy on contract you can still sell on contract and get a big down payment, title still stays in the sellers name, so he should have to worry. Either way, you should be clearer about you exit strategy before buying. KNOW what you are going to do. If you are not confident about being able to sell, make your agreement contingenct upon you finding a new buyer.

Don’t mess the seller around. Know your business and deliver on your promises. Sellers become a great advocate for you when you do that.

Ben Innes-Ker

Re: security for seller in a “subject to” deal? - Posted by PBoone

Posted by PBoone on April 07, 1999 at 10:58:47:

In any contract the title will revert back to the sellers if someone misses payments, this process follows the foreclosure proceedings.
My observation of your statement is the sellers would feel more comfortable in a lease/option that way the seller would not have to go through the time and expense of a foreclosure should some unfortunate circumstance occur.
I respect peoples choice to run things by someone they trust vs a stranger (me) some deals I’ve lost because the attorney didn’t understand. Not my problem I go to the next deal.

Re: security for seller in a “subject to” deal? - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on April 12, 1999 at 11:54:13:

>>However this should only be used as a last resort,
>> because frankly you just don’t know what kind of
>> situation you might find yourself in the
>> future. If you go around and do this everywhere
>>and the RE market tanks, you lose all your houses.

I don’t understand the logic behind this reasoning. If the RE market collapses you will lose all the homes anyway becase you won’t be able to meet the debt service on the homes. Why not at least give the seller a chance to take the home back and try to carry it under such circumstances ? As Jim Piper pointed out below, as long as it’s a nonrecourse, it can’t harm you.

Good ideas. - Posted by rayrick

Posted by rayrick on April 07, 1999 at 12:27:50:

Thanks for sharing Jim. I still don’t really see the big problem with performance mortgages. If the market tanks and I’m not able to make payments on my houses, the fact that sellers can take them back with their performance mortgages would not be the worst of my problems, it seems to me. What about the banks? They’d be foreclosing as well. It’s true in the former case its my credit getting slammed and in the other it’s the seller’s, but either way you lose the houses, and to be totally frank, if I stop making payments on my houses, by all rights it SHOULD be my credit getting trashed and not theirs. Does that sound crazy?

As far as your other suggestions-

  1. I’ve offered them my credit report

  2. I don’t have any previous customers, but I have offered them personal references and a previous landlord.

  3. Nice idea, I’ll use it if needed.

  4. I’d rather avoid doing this, since the deal is pretty skinny and won’t cash flow all that well. I’m looking forward to the option consideration making it worth my while. I’d kinda hate to sink a good chunk of that toward principal right away, but still, it’s a nice idea I hadn’t thought of.

Interesting that you say your goal is to NOT give performance mortgages for your first few deals. My reaction is that that is exactly when you SHOULD give them, if pressed. Once you’ve got a few going and have some favorable references, you should be more able to dispense with them, it seems to me.


Re: security for seller - Posted by rayrick

Posted by rayrick on April 07, 1999 at 12:02:44:

Thanks Jim, I’m curious if this is something that you do fairly regularly (if the seller shows concern about your performance)? Do you think the Bronchick performance mortgage form should suffice here? What value do you place on the transaction (always a subtle point in these performance mortgage thingees)?

Thanks again.


RR … - Posted by Redline

Posted by Redline on April 07, 1999 at 13:29:51:

With your smile, how could they resist!! :wink:


Not in This Case… - Posted by JPiper

Posted by JPiper on April 07, 1999 at 11:34:05:

In this case the situation Ray has proposed is a “subject to” transaction. Title DOES NOT revert back to the sellers. The sellers position is that they have deeded the property, and have no further interest in the property, although they have a continuing liability for the loan. They have no means of foreclosing.


The question boils down to… - Posted by Jim Beavens

Posted by Jim Beavens on April 07, 1999 at 13:27:37:

I think the whole reasoning behind not wanting to give performance mortgages is the simple principle of putting yourself in a position where you can’t lose (as LeGrand would say). However you’re probably right that it might make more sense to do this on the first few deals to “grease the wheels” as we get started. I’m just a little worried that I might then start to rely on this technique to close deals, as opposed to backing off and trying the L/O route.

In fact, I think that’s the question that this whole discussion boils down to, which I would like some resident experts out there to sound off on:

If you have the choice of (1) obtaining a deed “subject to”, with the caveat that the seller demands a second performance mortgage to protect their interest, or (2) obtaining a Lease/Option on the property, which would you do, and why?

Here’s my initial thought: If your exit strategy is to L/O the property to a new tenant/buyer, then buying with a L/O is probably sufficient…you don’t need a deed to do that. However you should be able to get more down payment money from an actual buyer when you sell on a wrap, which for all practical purposes DOES require a deed (Bronchick says this is a gray area, which is enough for me to stay away from such a situation).

So if there’s a big difference in what you could get as down payment vs what you could get as option consideration, then it might be worth it to give the seller that performance mortgage. There also might be a big difference in what you could get for a loan payment and what you could rent it out for (my uneducated guess would be that both of these situations commonly occur in the higher-end houses).

Any other thoughts on this?

Re: security for seller - Posted by JPiper

Posted by JPiper on April 07, 1999 at 13:44:04:


I’ve been using devices that look like “performance mortgages” for about 10 years. I’ve used them in flips, in situations to “tie up the loose ends” with both seller and my end buyer. My concern was exactly what this seller’s concern is, that they have no way to protect themselves in the event of a default on the part of my end buyer?..and whether this would result in any liability to me if the deal unraveled.

I’ve been able to negotiate around the issue as it pertains to me. I would not have a problem with executing one however, IF the recourse under the performance mortgage was limited to the property itself.


Re: Not in This Case… - Posted by Redline

Posted by Redline on April 07, 1999 at 13:26:40:

Agreed - but would it be possible to put some kind of clause in there that says that he would have to deed it back or would this not work?


Re: The question boils down to… - Posted by leslie dear

Posted by leslie dear on April 07, 1999 at 19:22:49:

I’ve done both. Currently I prefer l/o. I feel I have less liability. That is both for injured parties on the property and for future payments in a down market. As for down payments, I get $3k to $5k dn/option fee lately from my clients. I closed three last week, and have two set to close this week. The bigger dn deals usually take much longer. I have found sellers who are not comfortable with “subject to” will usually go for the lease option/purchase and don’t feel the need for an attorney to review a lease as much as they do for a “creative” purchase offer. They feel safer on title, get tax bene’s and free “propery management”. I remember many sellers who mentioned their attorney should look at my offer and they should look at my credit and only one in twenty or so ever followed through. Nowdays if they need counsel I don’t mind but I stay busy on the other offers. If they come back around fine, if its a counter full of demands…, I’m pretty busy on the easy stuff.