Sorry for the delay this month, it's been nuts the last couple of weeks.

We'd love to hear suggestions and specific questions you may have regarding real estate investing. Send us your questions and topics and we'll include answers, discussions with experts and responses in subsequent issues.

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Today's Topic: Buying Subject To (Part 2)
Issue #004
August 9, 2004
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Also this issue: Nominate real estate investing service providers for our free directory.

Buying Subject To (part 2)

Buying Subject To - Continued from Issue 03

Please note: I am not a lawyer or a CPA and I am not practising law or rendering professional legal or accounting advice. Any suggestions made herein are simply from experience. Check with your professional advisors prior to relying on the enclosed information.

To recap briefly:

We ended the last issue after suggesting that you should run a title report promptly after you sign a subject to purchase and sale agreement and make that agreement subject to a title report that matches what the seller told you going into the deal.

Also we suggested driving the comps - preferably prior to signing the purchase and sale to verify value.

The other topic was that many new investors make mistakes using the documents because they do not understand how to use them fully - and/or their implications.

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Another Alternative To Evaluating The Property
might be to ask a broker (or agent) - who is active in the market where the subject property is located - to do a CMA (current market analysis).

Other Problems With Subject To Transactions

Title can be a big issue if you do not get the deed when you sign the purchase and sale agreement.

Problems can arise regarding the title - even if you do everything you say you will and the seller gets everything promised in the agreement - if you bought the subject property and did not transfer the title into your name as the buyer.

One of the reasons this happens is that often investors are afraid to let the lender know that they are buying the property subject to because of the due on sale clause.

John T Reed talks a lot about the evils of subject to and the due on sale clause in his 'net rants on his website'. And actually he offers some very intelligent reasoning for his comments. It's a worthwhile read.

Suggestions For Subject To Purchases

1) Insurance

If you buy a property subject to, you will need to notify the insurance company to add you (your trust or your entity) as an additional insured on the existing insurance policy, effective the date of the transaction.

In addition, you will need to change the policy from a 'homeowner's policy' to a non-owner occupied policy.

From a practical standpoint, this can get pretty sticky. So it is actually easier to have the seller sign letters to this effect when you sign the purchase and sale and mail them right away.

This may not be a problem unless you have a fire or a liability lawsuit from the parents of the neighbor kid who fell out of 'your' tree and hurt himself on 'your' property - and you find out that you are not covered.

Another consideration is that often traditional residential insurance companies may not write non-owner occupied policies. So in addition to changing the type of policy, you might have to change insurance companies.

We have been interacting with brokers who handle commercial policies lately and are planning to create a 'blanket policy' covering a multitude of properties under the umbrella.

Kind of like adding more cars into an auto policy.

>>>TIP: You should find a good insurance broker and establish a relationship.<<<

2) Notify The Lender Of A Property Manager

It is good to notify the lender, with a letter signed by the seller, that you (your trust or your entity) has been retained to 'manage the property' and get a change of address in place asap to the attention of the seller c/o your entity.

3) Notice of Option and Option Agreement

If you can't get the deed, there is a technique that I have used that can be quite effective in terms of clouding the title - and thereby protecting your position.

Bear in mind that until you get title insurance, your position may not be protected.

But on some occasions I get both:

==> the deed (a warranty deed) and
==> an option agreement tied to the purchase and sale

as well as

==> a notarized 'notice of option' signed by the seller
==> and a limited power of attorney

On my notice of option, I add a clause in bold print on the face that reads:

"THIS OPTION AGREEMENT PROHIBITS ADDITIONAL INDEBTEDNESS"

directly below the full legal description.

The key to both the 'Notice of option' and the 'Limited Power of Attorney' is that they must be recorded against the property to be valid.

4) Notify The Lender That You Are Buying Subject To

If you notify the lender that you are buying the property subject to and then make the payments for 12-24 months, keeping the property insurance and the payments current, it is pretty clear evidence that the lender finds it acceptable and there is court precedent to that effect.

Especially if the loan was in default or behind prior to your purchase and sale agreement, often the bank will be happy just to get the loan back in service and put it back into their performing assets portfolio.

How you handle this is your choice, but I remember reading that some lenders hire outside data firm to collect the names of all homeowners who have changed the addresses for their utility bills.

The author's theory is that they are waiting until the interest rates go back up and then will start enforcing the due on sale clauses so they can write new loans with higher rates and get new loan fees.

If you notify the lender that you are making the payments on behalf of the seller (as manager) and they accept the payments, they will be hard pressed to show any damage in court. However, without early notification, you might be sunk later.

5) The Ugly Part Of Subject To

The real ugly part is when you go into the agreement with good intentions and you bring a loan out of default and clean the place up and after a year or two when you go to resell it or refinance it, you get a nasty notice from the seller's attorney that the seller wants their house back.

This is a good reason to get the deed and record it when you buy subject to.

Joe Kaiser has a release form on his website he created that's pretty thorough but I can't remember the URL right now.

When you buy subject to, know what you are doing and get a lawyer to go through all the documents you are going to use on a regular basis and tune them for your local market.

That is to say, make certain they cover local statutes and then learn how to use them and fill them out correctly.

Do not assume you know what you are doing until you do and you will eliminate most potential problems in the beginning.

6) Make An Effort To Build A Relationship With The Seller

Your best insurance is to establish a relationship with your seller and kindle it from time to time with a phone call or a note.

Also try to communicate clearly and follow through on your committments.

Obviously many of these suggestions apply to various types of transactions and are not limited to buying 'subject to' but they are particularly important for those types of transactions.

That's it for now...

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NOMINATE A REAL ESTATE INVESTING SERVICE PROVIDER

Nominate a real estate investing service provider to be added to our
free real estate investing services directory here.

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See you next time.

Best regards,

Michael Barrett