trust and Garn ST Germain question - Posted by Helen

Posted by John Merchant,JD on July 19, 2002 at 16:48:59:

…unless you do CYA with full, total, open and complete disclosure of the whole deal, including the possible risks to the seller, this is a worst case scenario of what COULD happen.

My home state, WA passed legislation, maybe 10 years back, dealing with “equity skimming” by REIs, specifically enacted just to protect the seller victims who were being scammed and harmed by unscrupulous buyers…who certainly did NOT in any way inform the sellers of what was really happening.

I buy subject-to myself, and certainly do utilize trusts, other entities in my own RE activitiies, but I myself am scared enough about the possible adverse consequences, that I do try to disclose and divulge enough info so the Seller can never say he/she was blindsided or baffled by BS to his/her financial disaster or detriment.

If my first comment on this matter scares those who might be contemplating dealing with sellers on these terms, then I may have actually committed a public service here.

In departing the subject, I’ll just say it never hurts to be careful. And if full open and total written disclosure does scare off your seller, just move on to the next seller who might be so motivated to sell that he/she is willing to take the risks-knowingly!

trust and Garn ST Germain question - Posted by Helen

Posted by Helen on July 18, 2002 at 21:42:53:

Suppose I set up a trust to take over a loan subject to existing loan. Since the trust is now on the deed, should the home loan not get paid (no I wouldn’t do this to anyone) would the original owners credit be damaged, or the trustees credit or whose credit would be damaged. who would be foreclosed on?

Re: trust and Garn ST Germain question - Posted by John Merchant,JD

Posted by John Merchant,JD on July 19, 2002 at 11:06:14:

I’m going to use a lawyer’s device here to try to drive home a point: a “hypothet” (a fictitious, or hypothetical factual situation).

Let’s jump ahead a year or so and the buyer finds himself/herself in financial trouble-ala Porter (OH)- and buyer has not kept up the payments on the
subject-to purchase of the seller’s home.

I know, I know, the buyer bought it in the name of a trust, or LLC, or whatever…stand by, this will make a point before I’m done.

The Seller is now being hounded by the bank to make up the back payments or else the house is going into foreclosure. And the Seller’s credit will then be totally trashed and Seller may be forced into BK.

Seller mentions this to a friend, who maybe suggests the Seller has been victim of fraud, maybe even criminal fraud.

Seller then goes over to the courthouse and has a little conference with one of the young, bulldog assistant prosecutors, in the DA’s office, etc.

Prosecutor wants to prove something and make a name for him/herself, so he/she takes the matter before the Grand Jury next time it’s in session (am I scaring anybody yet? Great!)

If I were a new, assistant prosecutor, and the Seller came to me and told me all about this deal, believe me I’d be willing to spend some extra time on it just to help me build my name and reputation as a young “crime fighter” so this would be an opportunity and a half!

And the real buyer (forget the legal entity on the deed)would maybe find him/herself handed a subpoena and ordered to appear in front of the Grand Jury and explain just what happened here.

Now the $64 question: How would YOU like to be that Buyer and have to take the stand and testify, under oath and answer that assistant prosecutor’s ugly, penetrating questions about what you told that seller and what you had done to him/her?

And remember,normally NO lawyers are allowed to assist witnesses in front of the Grand Jury, so wouldn’t matter if you had the best criminal lawyer in the USA…that lawyer couldn’t go into the Grand Jury with you and advise you of anything. You’d be all on your own! Sound fun?

So may I mildly suggest: the BEST time for you to hire a good lawyer might be BEFORE you get the Seller’s name on the subject-to sales contract and before the whole situation starts avalanching down the mountain !

I’ve known some strong men and a woman or two who decided to shoot themselves, in just this kind of deal.

Do you REALLY want to be in that boat?

Re: trust and Garn ST Germain question - Posted by JHyre in Ohio

Posted by JHyre in Ohio on July 19, 2002 at 08:47:58:

The sellers’ credit would be damaged, they could in turn sue you, obtain a judgment and destroy your credit. 95% of subject-to problems arise from buyers’ failure to make payments on the underlying loan.

John Hyre

Re: trust and Garn ST Germain question - Posted by Tony-VA

Posted by Tony-VA on July 19, 2002 at 07:52:09:

The Trust has not signed any loan. Moral and good business suggest payment is necessary but remember the Seller in a Subject-to deal is deeding you the property while remaining on the loan. Thus the reason for the CYA letter and documentation.


Re: trust and Garn ST Germain question - Posted by Tony-VA

Posted by Tony-VA on July 19, 2002 at 16:18:48:


It seems you are putting a bit of a hyped scare on this subject-to deal that uses a trust. These deals are quite common and I do agree that you must know what you are doing and not just try doing one based upon a few posts or conversations.

Documentation and CYA disclosure is going to be very important and I believe in Johnboy’s method of providing the Seller a contractaul recourse to take the property back in the event of default by the investor.

Your post makes it appear that we should all run scared from Subject to deals for fear that we will become the victim of an overzealous prosecutor looking for the next Porter case. How many Subject to investors do you suppose there are vs. how many Porters there are?

Every profession has people who get into trouble and admittedly they do muddy the waters for the rest of the legit folks. Especially as a fallout after a high profile case.

As for criminal prosecution. For agrument’s sake could you explain the true likelihood of a prosecuting attorney getting his “suspect” (since you have made this a criminal act) to be compelled to testify in court against himself? What about the 5th ammendment? Grand Juries are typically a very one sided affair in which the suspect is NOT present. Rules of evidence are extremely relaxed. Hearsay evidence is presented in any manner the prosecutor can muster in order to convince a jury of laymen that probable cause is present to issue a true bill. Mickey Mouse could be made to appear guilty of the Hoffa mystery. But a grand jury indictment is NOT a trial. Should a trial commence, the investor would provide argument and evidence such as the Seller’s need for immediate solutions offered by the investor, CYA disclosure docs etc. But again I digress from the fact that simply by buying suject to, you do not necessarily expose yourself to any of this criminal inquiry. Commit some fraud then yes, but that is not how a subject to, done properly, works.

I am not seeking a lengthy argument, just feel that you could better portray a subject to deal and balance the scales better than you did in this post. In reading other posts by you, I have seen you provide viable concessions and arguments for both sides. This post seems too one sided so as to shock investors away from a legit means of investing. But this is simply my opinion.

Best Wishes,


Re: trust and Garn ST Germain question - Posted by Helen

Posted by Helen on July 19, 2002 at 13:57:38:

Thank you. No I don’t like the idea of being on the bad end of a Grand Jury…been there & done that in a town much like Mayberry and I just couldn’t win with Barny and Goober.

I have no intention of cheating anyone or messing up there credit…just trying to figure out how everything works. I am in the middle to two Subject to situations and would like to make sure everything is covered so I can sleep well at night. Anyone have a CYA letter you would share?

Re: trust and Garn ST Germain question - Posted by Tony-VA

Posted by Tony-VA on July 19, 2002 at 16:29:04:

John this is a good argument for providing the Seller some sort of recourse to gain the property back in the event the investor fails.

I do not believe a CYA letter alone protects the investor. Sure it helps disclose the risks to the Seller and I am not suggesting the investor not use such a letter. I think documentation will be important. It always is in hindsight after a worse case scenario has occurred.

We never intend to fail in business deals but life happens and there may come a time when the money simply isn’t there to make that payment.

In my humble opinion, a hugely one side, non-recourse transaction could shock the conscience of the court if the investor failed and bailed on the Seller leaving them hanging without a means to regain the property but still owing on the now defaulted loan.

I have spoken with many Subject-to investors and was suprised that many of them did NOT offer the Seller any recourse. Now perhaps they feel that if all goes wrong and nothing can be done to save the deal, they will quitclaim the property back to the Seller. But if we did end up in court, I would prefer to come across with a documented, contracted, good faith approach to the deal gone bad.


Re: trust and Garn ST Germain question - Posted by Helen

Posted by Helen on July 19, 2002 at 14:00:51:

Thank you John. I’m having my buyer pay my company so that I know the payments get made to the creditor. With that and a CYA letter should I be o.k. barring a bankruptsty in the future of the person on the lien?

Thanks to Tony, John M and yourself for these helpful responses.