- Hey everyone, Clint Coons here.
And in this video,
I wanted to put together something that addresses
a common question I get.
And that is, how do you buy property,
subject to and make sure you're protected?
All right, let's get started.
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So when you're buying property subject to,
I mean, the risk that most people think of is,
what happens if the lender finds out about it?
'Cause remember, in is subject to transaction,
what you're typically doing, is you're buying property,
subject to an existing mortgage.
So here's a seller, right here with this piece of property,
this is the seller,
and the seller wants to sell me this house.
It's typically, they're in a distressed situation,
they're behind on taxes, they're behind the mortgage.
So what the buyer is going to do over here,
is the buyer is gonna come in
and make an offer to acquire this asset.
And typically, it's going to be,
"Hey, I'm gonna reinstate the mortgage, bring it current,
pay all the back property taxes, galva liens,
everything else picked up.
So I'll take care of that for you.
And maybe I'm going to give you a couple grand as well
on top of that,
and then you're gonna deed me the house.
That is the sale right there,
you're gonna transfer the real estate to me."
Now, when they transfer that property to you via deed,
they remain subject to the original mortgage,
that is, we're not paying off the original mortgage,
this property can have a mortgage on it, for 170K,
that's gonna stay there.
Because this individual, this buyer,
who's buying the short sale,
they don't wanna use their own credit, right?
Why not pick up a property
that has an existing mortgage on it,
doesn't require you to go out there and get a loan?
Because the loan was already obtained by this individual,
all you're agreeing to do is,
"Hey, I'm just gonna keep it current,
I'm gonna keep paying it."
And then you turn around,
and you're gonna rent this out to a family
who's gonna move in there and then pay you rent every month,
and you're gonna turn around and pay the mortgage,
and then keep the difference.
That's how this typically works
when you're buying property subject to.
Now this individual over here many times,
that has purchased a property from you,
you have to let them know the entire transaction,
in fact I've told people,
have your contract review by a local attorney.
So it protects you from them later
coming back against you and say,
"Well, I didn't understand,
I didn't know this mortgage
was still gonna show up on my credit,
I was still gonna be responsible for it."
So it's always good to make sure
that they have had the opportunity
to seek independent counsel to review the transaction,
explained to them, what their rights are in this agreement.
And you know, potentially,
what challenges they may face
if you don't pay the mortgage and so forth.
So that's always important.
But what's equally important, though,
is how do you transfer this title from somebody here,
to you be this deed,
without getting the bank alerted
to the fact there's been a transfer.
Because there's always that concern
that if the bank finds out,
well, they may accelerate,
because they might be on heightened alert,
'cause this person was already behind on their mortgage.
So here's some of the creative techniques
that people have come up with.
One set up an LLC,
put it in the limited liability company
and then transfer the LLC
to this individual buyer over here, that works great.
But if the bank looks on title
and they see it tell them the limited liability company,
they may assume now that the homeowner
sold the property to an investor.
And the homework course is still liable on the note,
they're not gonna want that.
So that's a problem.
Now, the likelihood of that occurring,
it's probably not huge.
But if it concerns you,
then Your other option is to use a different tool.
And that tool is referred to as a land trust.
And if you know, been a student of my channel for a while,
I've got plenty of videos on land trust,
I'm not gonna go into how a land trust works.
But the reason why a lot of subject to investors
use land trust,
it's to not alert the bank should they look
to the fact there's been a actual transfer
of that real estate to the end buyer investor.
So with the land trust,
they're gonna set up the land trust here.
And the seller will deed the property into the land trust.
So they deed the property into the land trust
and you're gonna be the beneficiary down here
on this land trust, you're the bone, you.
So they transferred into land trust.
Now, when you take title on the land trust,
you're always gonna take title in the name of the trustee,
name of the trust.
So Suzie to trust the of the green horn land trust,
is how title might be taken.
So I've seen a lot of investors say well,
they will use the seller
as the initial trustee on their trust.
So we'll set it up that way.
This is Suzie Q, they'll her be listed as a trustee
deed the property into the trust.
And then after the property has been transferred
into the trust name,
Suzie resides and Karen steps in here
as a successor trustee, is Karen.
And no one knows about this.
So if the bank look,
they would think that Suzie created in an estate plan,
and they're not gonna accelerate the estate plan
because they're gonna allow it to go into a trust.
They don't know what the mechanics of the trust,
because it's not recorded anywhere.
All right, so what's the risk in doing this?
The risk in keeping Suzie Q on there as trustee initially,
is that if anyone looks they assume
like the bank does it's Suzie still owns a property.
So what could Suzie do if she felt so inclined?
You probably already figured it out.
Why couldn't you just sell it to another person,
because another party would look,
title would look and see her name on there
as trustee of this trust,
she provides them a trust agreement she just makes up,
she find something on the internet,
types it all up,
lists herself as beneficiary gets it notarized,
gives it to the title company,
now she can close on the name of this trust,
she has a bank account setup,
she receives the proceeds.
Next thing you know you've lost the property.
That is the risk when you leave the seller on there
as the trustee.
So what is an option then for you
when you're buying subject to to avoid this?
There's a couple things you could look at.
Number one, use an LLC as the trustee.
So you have your LLC set up,
I typically use a Wyoming LLC as the trustee,
so their name is not gonna be listed there.
Now could this make a bank think well,
maybe this is a transaction,
they did sell it to an investor?
Yeah, you could do that.
Or another way to do it, is how you take title.
Okay, so if you look the way you're taking title,
maybe you do not list the trustee,
you only list the trust name down
and you leave the trustee off,
and you just have the trustee sign at the bottom.
The risk in doing that, is that you make cloud title
and make it difficult to sell the property in the future.
But I've had individuals that I've worked with
that are real estate investors
that tell me they do avoid putting the trustees name down
when they're buying subject to
because they're concerned about that the bank looking
and seeing that third party there.
At the end of the day, it comes down to this.
If you want the most protection
when you're putting together a subject to deal, all right?
Don't use the seller as the initial trustee of that trust
and leave their name on there.
Because that information
is going to be publicly available to a lender.
If you did wanna do that
because you're concerned that the lender might look,
give it a seasoning period then.
When you go through this transaction,
have the seller give you a trustees deed,
this is critical.
Okay gives you a trustees deed
which transfers the trustee ship to you
for recording purposes.
And then leave that seller on there for say six months,
and then go down and then put yourself on or better yet,
what I would suggest to do is use that Wyoming LLC
as the successor trustee.
So rather than Karen, she has a Wyoming LLC set up here,
that's what the trustee will do.
It states that when Suzie is no longer serving
then the Wyoming LLC takes over.
So get that trustees deed from her
and record that in six months.
So you would shorten that timeframe
where you're gonna be at risk.
It just a part of investing, right?
There's always gonna be some risk
when it comes to investing in real estate,
subject to deals.
Your greatest risk is going to always be the lender
if they accelerate.
In my experience, it doesn't happen very often
'cause banks are in the business of loaning money
not owning property,
and as long as that mortgage is being paid and its current,
you really don't have an incentive to look.
But use this as your guide going forward.
If we can be of assistance to you
be sure to set up a strategy session with our firm,
it's in the show notes.
Other than that, all the best with your investment.
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