Alternative Sub-To Deal (seems A Lot Simpler To Me)???
I just got started setting up my LLC to do business today. As I met with my real estate atty, I asked him about sub-to deals and how he would go about doing them.
He obviously brought up the DOS clause, but said something that I thought was beautifully simple compared to the way most of these deals are done (keep in mind I have not done any deals yet, but have read about them).
He said that what you should do (after getting the mortgage current, paying penalties, etc.) is simply write up an option to buy the property (with control of the property) at whatever the current mortgage balance is for an indefinite period of time (or set the time if you want) and record the option against the property at the court house. He claimed that it was a lot simpler, and there was no way that would trigger the DOS clause, you would control the property and could buy out at whatever the mortgage balance was whenever you wanted.... Anyone out there done this? Does it make sense? What is the down side to not being on the title??
Sounds like your attorney is suggesting a lease option instead of sub to. I really like lease options, usually I can get in for no money down, fix up the property, and L/O it back out before I have a payment due. I always suggest to tenants that they talk to a mortgage broker before signing the lease to make sure they will qualify for financing by the end of the lease. Then again I've never done a sub to deal so I don't have any comparison. Good Luck!
Options are recorded at the courthouse?? I thought they were only in the lease agreement between the party's
Somebody send JohnLoke a PM with this link in it. I would like to hear an expert opinion too.
[addsig]
Yeah, as far as recording an option or lease option, you can either record the whole option or a "memorandum of option" at the courthouse against a property - check your local laws... If you don't want to record at all, you don't have to...
What this does is put a "cloud" on the title an means that most likely any future transaction against the property will have to go through you.
I too would love an expert opinion....
Your real estate attorney seems inexperienced in this area to me. The due on sale clause is indeed enacted using this technique. Most DOS are written indicate any transfer of ownership OR interest in the proprety. There is a law that says that leases under 3 years of time do not break the DOS clause. If you move out of a house and let your children or mother live in it, you have violated the DOS clause. You do not need to transfer ownership.
HOWEVER, a lot of people around here talk about ways to get around the DOS clause but really they are talking about ways of not getting caught. This way might do that but it leaves open too many problems for me. We are still talking about the same subject here.
Good luck[ Edited by myfrogger on Date 01/24/2004 ]
In my experience depending on the condition of the Real Estate Market, I have in many instances assumed title and then called the Lender, Informed him of the transfer in title and ask what his requirements are to enable him to smile thru the day and not be unduly alarmed. Most of the time I fill in a 1003 or some other form of Financial Exposure Document and send it to them. If their interest is at market or a little above, thats about it. The worst I have ever had is a nasty call from one of their contract brokers telling me that I would have to pay a point for the fun of making any future payments. I did not pay the point cause I lied and told them that all of my Investors who were holding their crummy CD's would be asking for payoff on next quarter. I named ten and thats the last I ever heard.
Remember that a Loan Service Officer/Clerk, wants to keep a trouble free loan rolling along with no problems. You are probably a better Borrower then the prior one so whoopy. Enjoy.
Lucius.
If the house is leased without an option no problem, BUT a lease with an option to buy would trigger the DOS clause. So in fact that could be just as bad as taking the deed. The big thing is here that it does not happen. The bank does not want the house. When you truely understand that this becomes so very easy.
Best to you
Sire
The DOS aside, L/Os are a more troublesome method of "buying" than subto.
First, in a L/O transaction, you don't own the property, the seller still does. That means that he is free to borrow more against the property, declare BK with the property in it, and even sell it. Filing an option may cloud the title, but all it will really do is keep you in the loop, should the seller do something with the property. A BK will still get filed. A loan will still get thru. And likely a sell will still go thru. As option holder, you may get any difference of price over your option amount, but likely, that's quite a bit less than what you were expecting from your tenant/buyers, which creates another problem for you if any of these events happen because you will be unable to produce a clear title as agreed upon with your T/B.
L/O's pose another problem as well. IF you L/O from the seller and sub L/O to a T/B, then you in order to sell to your buyer, you must perform a double closing. Double closings are increasing difficult to do correctly and legally, are expensive and severely limit the end buyer's ability to get financing, due to no title seasoning.
That said, L/O's have their place in investing, but in general, I'd prefer to own my properties over just "controlling" them.
Roger
fordecan,
Glad to meet you.
What you are basically doing is clouding the title to the property by filing an option and I believe this is what your attorney is trying to accomplish.
The question to ask your attorney is if your seller, files BK, has an IRS lein placed on him or some other judgement placed against him which will attach to the property, will your option overide the above from giving you clear title to the property when the time comes for you to sell without having to pay off the attachments or liens.
Here is what I know stops the above from attaching to the property and causing you grief, the deed is in your name, company name, etc. you own the property so whatever attaches to your seller after you have the deed does not attach to the property.
The DOS clause is not, has not, will not ever be a major concern of mine when doing Subject To properties. I keep the payments current, get in and out of the deal within two years in most cases.
The majority of time when you hear of the acceleration clause being envoked is because the payments were not made on time, or the investor was running a meth lab in his basement and the newspaper says "Subject To investor arrested and has DOS envoked."
John $Cash$ Locke
If I were to say, fire the atty for horrible advice, would that be too harsh.
If so I wont say it. But if not then I say fire the atty for horrible advice
Thank you all for your input.
I acutally forwarded all of these comments to my attorney. We'll see if he gets a little sheepish when he responds to me.
Truthfully, I feel he is not at all familiar with creative real estate deals....
He may not be my attorney for long....
Your question was adequately answered. We're not afraid of the DOS. An Option has to have an expiration date. It can't be for indefinate period. I've said it more than once, an option is supposed to "cloud title" it's just that I've seen title companies miss them and insure over them. It's not supposed to happen but it does.
I think one of the best lessons you learned is to rely on an attorney for legal work but they're not to be used as real estate consultants. Most haven't the foggiest Idea how to do real estate.