Subject To Real Estate Deal Structures

Subject To, Subto and Sub2 all refer to the structure of a real estate deal created by private sector investors. The Sub2 deal structure first started being used in the early 1980’s when mortgage rates skyrocketed to over 16%.  Over the last 50 years this deal structure has been modified and perfected to protect both the seller and buyer while producing incredible solutions and savings for both parties. With the assistance of a knowledge attorney and title company, the Sub2 deal structure can solve problems in turbulent markets.

A properly formed Sub2 keeps the existing mortgage intact by placing the property in a Land Trust with a third party as the ‘Trustee’ and selling only the personal interest of a property.  The seller still has an interest in the property up to the mortgage balance(s). At closing, the seller assigns controlling interest via an ‘Assignment of Interest’ of the trust including ‘Power of Directive’ to the buyer.  The transaction closes at a title company, transfer taxes are paid as normal and the deed is filed in the name of the trust with minimal consideration recorded. 

When the seller is upside down on a property a properly formed ‘Sub2’ structure not only saves the buyer from having to short sell the property, but the buyer will help repair the seller’s credit by making consistent payments.

WRAP Mortgages are Hybrid Sub2

A hybrid version of a Sub2 is a Sub2 with a Wrap Mortgage. For sellers in a sound financial position, they could elect to sell the property with seller financing in the form of a Wrap Mortgage to create a Win-Win for both the buyer and the seller.  This typical structure of a ‘Wrap’ makes the sellers the 2nd lien holder and the buyer is offered a rate less than market rates giving the buyer a huge savings in their monthly payment. The seller will continue to service the mortgage to protect their credit and their 2nd lien position. When the market stabilizes, the buyer can then refinance the loan when it makes financial sense to do so. Once all liens have been satisfied, the buyer can place the property solely in their name or in the name of a different trust.

You Pay You Stay, You Don’t You Won’t

The ideal buyer for a Sub2 mortgage is someone that is financially sound, but sitting on the sidelines waiting for rates to come down.  The kicker is that as soon as the rates come down, home prices typically jump up.  With Sub2 being such a great deal for the buyer, the buyer will want to build up reserves to make sure the mortgage payment gets paid without drama.  

With the mortgage still in the seller’s name, the seller will have faster recourse with a Sub2 in the event the buyer defaults.  While it can take a traditional lender 8-12 months to foreclose a property, a Sub2 seller will be assigned control of the land trust if the buyer defaults without needing to complete a foreclosure. The terms of when the seller takes control back will vary based on the buyer’s down payment and what terms both buyer and seller agree to.

Customizable

Sub2 and Wrap deals have a tremendous amount of flexibility in that both Buyer and Seller will negotiate the details that will create their own Win-Win. The secret is in the proper deal structure and working with professionals that have a proven track record with the Sub2 deal structure.  When we help coordinate seller financing via a Sub2 or Wrap, we require both buyer and seller to talk to the attorney that creates the land trust.

Summary Of A Subject To Deal

1. Buyer and Seller agree to Terms of the Sub2.
2. Property is placed in a Land Trust typically titled “123 Main St Trust dated MMM DD, YYYY”.  
   1. A 3rd party is hired to be the trustee.  In the investment world, this stipulation is more about anonymity and asset protection, but one could argue that all properties should be placed into a trust.
   2. Within the trust, the ownership of the personal interest is assigned to the buyers and gives the buyers directives they must follow to protect their equity and ownership rights.
   3. The directives within the trust stipulate that the buyer must make $X mortgage payments after the closing and further stipulates that in the event the buyer misses X payment(s), the seller will have recourse by taking control of the land trust.  Example: Buyer missed 2 payments in a row, prompting the seller to send out a 5 day notice to cure.  If the buyer doesn’t bring the mortgage current in another 30 days, then control reverts back to the seller.
   4. During the closing, the seller will sign a letter to be submitted to the mortgage company assigning the buyers as the property manager(s) for the property and authorizing the buyers to discuss directly with the mortgage lender regarding all matters pertaining to the mortgage. 
   5. Seller gives buyer Power of Attorney regarding the property and mortgage.
   6. Seller shares mortgage login credentials with the buyer so buyer can monitor that the payments are applied and escrow is properly serviced.
   7. The land trust will stipulate that the seller must assign over any escrow overages or insurance refunds back to the buyer.
3. The buyer's 'Entry Cost' may include any monies the seller is in arrears. This is general in the form of the buyer's down payment and their closing costs.
4. A new insurance policy is bonded naming the seller’s mortgage company as first lien holder and the name of the trust as the insured.
5. When rates lower and it is financially logical, the buyers will either pay off the mortgage or refinance the property and place the property in a new land trust removing the seller’s interest in the property.

Common Questions Regarding Subject To Deals

Q. Can I still do a Sub2 if my mortgage has a ‘Due On Sale Clause?’

Short answer is yes.  Most mortgages have due on sale clauses and the engineers of Sub2 deals (attorneys) have crafted a way to keep the mortgage intact via the land trust.  

Q. What happens when the escrow account gets recalculated and there is an excess in the escrow account?

The trust will stipulate that these funds shall be returned to the buyer.

Q. What happens when the escrow account gets recalculated and there is a shortage in the escrow account?

The buyer can either add additional funds in the escrow account to keep their payment the same or their payment will go up just as it would if the seller was still making the mortgage payments.

Q. What securities does a seller have that the buyer is going to be invested in the property?

The buyers will be significantly invested from the start of the purchase.  

The buyer’s ‘entry fee’ is essentially their contribution to the seller’s closing costs, any monies in arrears on the mortgage or taxes plus their down payment that will be applied to the seller’s mortgage.  

Month after month, the buyers will continue to pay down the seller’s mortgage becoming further invested with each payment.  

The buyer will also be maintaining and improving the property increasing the property’s value even further. 

Q. Who is responsible for repairs?  

The buyers are responsible for the property, including all repairs. The sellers are NOT landlords.

Q. How will a Sub2 affect a seller’s buying capacity for another mortgage?

Once the buyer has made 12 months of payments on the seller’s behalf, a lender will not calculate the mortgage payment in their debt ratio.

Q. How will a Sub2 affect the seller’s credit score?

For sellers with low credit scores due to financial hardships, the buyer’s payments will help improve the seller’s credit.  This is a complete 180 degree change from the alternative of the seller selling the property as a short sale.   

Q. Who writes the trust?

An attorney that is well versed in Sub2 Land Trusts.

Q.  How and where is the transaction closed?

The closing will be performed by a Florida title company that is well versed in Sub2 transactions. We use an attorney in Orlando, so you can expect the closing to be done with a mobile closer.

Wrap Sub2 Example - Details will vary based on the deal buyer and seller negotiate.  Call Jeanie to learn more.