Posted by Russ Sims on February 12, 2002 at 11:55:06:
I think in the best of all worlds you’d want the beneficiary to be someone other than the trustee. But keep in mind no one is going to know who the beneficiary is except for the trustee. When the property sells, the trustee gets the proceeds from the sell, and then is responsible for distributing the funds to the beneficiary…if that happens to be the trustee, well, who’s going to know unless there’s some type of audit (which my county has the power to do). I’m certainly not aware of any laws pertaining to this issue and I’d be happy to get the input of others on this. In my case I let my company be the trustee, and then designate myself as the beneficiary.
Russ
If I bought a house sub2, how do the seller and I work it out with the bank. Do we not have to have the bank start sending the monthly bills to me now?
And even though the bank would obviously not enforce the DUE ON SALE clause now with interest rates so low, what is to keep the bank from calling the loan due if interest rates were to go up to like 14% in a few years?
I’ve read the How To article on sub2, but still have no idea how to work it. In other words, were I to offer it to a seller and the seller said “…Huh?”, what would I answer? How would I make him feel comfortable with the idea?
How can it be that he gives me the deed yet the loan and risk stay in his name? If I were a seller I would ask, “How do I know you’re going to pay these monthly mortgage bills?”
I have a million questions on this. Anyone who can give a full discourse on the subject, or point me to the right book, I would appreciate it. Thanks in advance.
Posted by Russ Sims on February 11, 2002 at 12:34:05:
You do need to have the bank start sending you the statements as soon as possible. Easiest way to do this is to simply get the seller’s most recent statement and fill out the change of address which is ususally on the reverse side of the payment coupon. I don’ t even change the name…I simply act as if the seller’s mailing address has changed.
If you set the ‘subject to’ up right, you don’t have to worry about the due-on-sale…because all you’re doing is deeding the property into a Trust. This does not violate the due on sale…It DOES violate the due on sale when you have the seller assign his beneficial interest over to you. But the bank will never know of this assignment because it’s a private document kept in your personal file.
As far as explaining the ‘subject to’ to the seller, the first thing I say is that I’ll take over the payments on the home until I can refinance it.And that really sums up the transaction. It’s really simple in concept. I usually don’t even mention the Trust until we sit down to do the signing, and then I explain the due-on-sale and the reason behind the Trust.
I usually deal with seller’s who are in dire situations. Either they are getting a divorce or they will lose the home to foreclosure. They trust me to take over their payments because they often have no choice…Nevertheless I always produce my references and talk about my track record with other home sellers. If you have no track record, get some letters of references, preferably from influential people like bankers, attorneys, community leaders, business owners (previous employers). Join the BBB and Chamber of Commerce.Get a business phone number so that you show up in the phone book under your business name. This says to the seller that you take your business seriously and that you’re here to stay.
I learned most of what I needed to know about ‘subject tos’ by taking an older Bill Bronchick course…that course has been updated and I think it now goes under the “alternative finance” name. I know there is a book offered on this site called the “ABCs of Subject To”. I haven’t read it but that would probably be a good place to start.
Russ
Russ,
Thanks for the insight. Sounds like you know EXACTLY what you’re doing. I have a question or two on trusts if you have time.
Do I have the bank mail statements to my address in my name, the seller’s name, or the trust’s name? If anything but the seller’s name, won’t the bank catch on. (I understand the bank probably wouldn’t care that much anyway, given the low interest rates right now, but what about if rates went high.)
How exactly do you “deed a property into a trust”? Do you use the trust’s name as the buyer on the Purchase and Sale Agreement? And for what consideration … $1?
Is this usually a no-money down deal? Or do most sellers want money?
A possible scenario, does this sound right?: Joe Smith and I sit at his kitchen table and I agree to take over his payments. I give him $2,000 so he can get an apartment or otherwise move out of the house. We set up 123 West St. Trust, with me as benficiary. He’s out of the picture, I own the house for $2,000.
Posted by Russ Sims on February 12, 2002 at 02:09:09:
Hi Jim:
On the change of address I just change the address only, not the name. I get John Seller’s statements, as well as a lot of his junk mail (he should thank me for that)! I follow up the change of address with the letter informing the lender that the property is now in a trust, and I’m the trustee… I ask them to please acknowledge the trust and send all further correspondence to me, the trustee.Trouble is this letter takes a while to course its way through the system. In the mean time I really want to get the statements…that’s why I immediately do the change of address thing. At least it gets the correspondence coming to me right away. Now sometimes the lender sends me a letter saying that they will only authorize the transfer to the trust if the trust has this feature or that feature, meets this condition or that condition.And, by the way, they’d like to see a copy of the trust. If the lender want’s to get picky about it then I just forget it; the property is already in a trust and I don’t need the lender’s sanction. I simply stay quiet about it and never hear from the lender again regarding the trust issue.
I simply use my company name on the purchase and sales agreement with the seller. I don’t see any reason to mention the trust in that document.
Yes, this is almost always a no money down deal. Believe it or not sellers are usually glad they don’t have to PAY money to get rid of their home. In those instances where sellers do insist on money, I rarely give cash…If the deal is good enough I’ll give them a note. This note usually has no interest or payments for 3 years!! By the 3rd year I’ll have my buyers qualified for financing so I can cash the property out.I have done a couple of deals where I’ve given cash soon after signing. I will do this only if there’s good equity in the home. One recent deal we did required that we pay the seller $3,000. $1,000 within a month of signing and another $2,000 within 8 weeks of signing. We hoped to have the home sold (and our buyer’s down payment in hand) in time to pay that short term note. The home didn’t sell so we had to come out of pocket for the dough. But any time you can pay $3,000 to gain over $50,000 in equity, it’s hard to turn down. Best thing is we DID wind up selling that house to a young couple who pulled $38,000 out of a trust fund for the down payment (that amounted to 25% down).
I agree with you: it’s a ridiculous notion, this idea that someone would sit down at their kitchen table and just deed you over their home. But it HAPPENS ALL THE TIME. We just took one home over from a couple that didn’t even read our contracts…they just signed them. In fact THE NOTARY read the contracts more thoroughly than the sellers.You see the sellers were getting a divorce. Their home was the least of their worries and they were glad to turn it over to us…
Good luck,
Russ
Posted by RS (So. CA) on February 12, 2002 at 24:11:49:
From what I have been reading, it’s not ridiculous at all.
Regarding trust…here is a very basic step by step (per Bronchick’s Alternative Real Estate Financing course):
you draw up the trust agreement naming you as the trustee and the seller as the beneficiary of the trust.
The seller signs the deed over to you as “trustee”, which transfers the property into the trust.
Have the seller then sign a limited power of attorney and authorization to release loan information.
Have the seller sign a “Due On-Sale” disclosure.
Seller gives you loan payment book or monthly statment and you send in a change of address. You can leave the sellers name on the change of address or you can name youself “as trustee of the 1234 Main St. Trust”…personally, I would just leave it alone, especially if you arent going to be holding the property for very long.
Obtain new insurance on the property naming you as trustee of the trust as the beneficiary.
The seller then assigns his beneficial interest over to you.
steps 1-4 & 7 requires a notary (probably wont need the authorization to release info notarized, but it shouldnt hurt either).
Posted by TRandle on February 11, 2002 at 23:52:35:
jim,
How about Mr. Seller pays YOU $2,000 (or the next two or three mortgage payments) to buy his house so that you have adequate time to find a decent TBer to put into the house? Yes, it happens this way as well.
Posted by JFinke KC on February 12, 2002 at 08:56:26:
RS,
I am still learning about trusts and I have a quick question. In point 1 you indicate that the property is deeded into a trust with you as the trustee and the seller as beneficiary. Then in point 7 the seller assigns his beneficial interest over to you. I understand the process, but I was under the impression that the same person could not be both trustee and beneficiary. Am I wrong in this or am I overlooking a step in your process?
Some states say that if the trustee and the beneficiary of the trust are the same, then there is a merger of interests and the trust is of no significant consequence. This is sometimes referred to as a “Dry Trust.”
The points made below about the selection of the trustee are correct. It is preferable not to be in the public records owning many properties, even as a trustee. It attracts too much attention and serves no purpose. Diversify.
For holding properties, the beneficiary could be your LLC. This offers another layer of protection, and avoids the dry trust issue.
Posted by RS (So. CA) on February 12, 2002 at 12:33:50:
I have Bill’s Land Trust course and as far as I know, there is nothing illegal in serving as the trustee for a trust where you also hold a beneficial interest. Indeed, I believe a fair number of “living trusts” (estate planning) are set up this way. However, it may technically be a violation of your state’s corporate statutes if your corporation serves as a trustee, unless your corporation meets certain state requirements and is registered as a trust company–but are you going to report yourself? Is your seller and/or buyer going to report you? If the answer is no, then you probably can get away with it. In any event, you should discuss this with your attorney if you plan on using your corporation as your trustee, just so you are clear as to the risks and potential consequences.
Russ is correct in that ideally you would want someone else as the trustee for privacy reasons–if that is a concern for you. Personally, my ideal person would be a trusted friend, or relative with a different last name, who is also your attorney and lives out of state, but licensed to practice law in your state. Now, that is a lot to hope for chuckle, but it provides the best privacy protection scenario I can imagine. That is, not only is your trustee out of state thus making it more difficult to be served in case of lawsuit (I believe most county/municipal court summons are not binding across state lines), but you are probably also protected by attorney/client privilege.
Other than privacy through obfuscation, I can’t think of another reason to have a third party serve as trustee. I am sure (and I hope) there are more learned folk that will correct me, if I am wrong in this.