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Dear Jackie and Forum Members,
My husband and I have taken over three mortgages as subject-to properties. We don’t like being landlords so we’ve sold these properties on Contract for Deeds. The properties are in Missouri and Kansas. We have a mentor/friend that has been doing this for over 20+ years with about 30 properties. He is a great resource but I’m not sure I always agree with his ways.
Since we sell on CFD’s to people with “not that great” credit, we usually change the underlying mortgage homeowner’s policy to a landlord policy. We explain on the contract that the buyer’s contents are NOT insured. Our mentor usually puts a $2500 deductible (not all mortgage companies will allow that) and pays for Actual Cash Value on the property vs Replacement Costs. We recently had a roof claim and the buyer was upset that we didn’t have Replacement Cost coverage.
As all insurance companies do, the premiums keep going up every year. I’ve been talking to different insurance companies to get quotes but some tell me the Buyer’s should be getting their own policy while others want me to put them all under a commercial umbrella type policy. Suggestions? Ideas?
I do an annual escrow analysis and change the buyer’s payments as the taxes and insurance change but I just don’t feel I’m doing this correctly.
Has anybody eventually refinanced their Sub 2 properties once their value was high enough? Is it worth it? Even if the CFD buyers cannot ever qualify for their own loan?
I’d also love to talk to someone about how they do their taxes sometime too….is this an Installment Sales Income or treated like a rental since their name is not on the deed? My CPA and I disagree.
Ugh! I really like getting a property for little to no money down and helping out folks who otherwise might lose their home and credit in an ugly mess. We also like giving people who don’t fit the mortgage “box” a chance to be homeowners. We also don’t mind if we have to take the home back and re-sell it again if necessary. Win-win-win. Right?
Thank you for all your ideas, suggestions and thoughts. Very much appreciated.
Darcy
Darcy,
I do a lease and an option contract for the rights to the bennifical rights to a land contract. Kind of what Jack Shah does. I tell them to get renters insurance for their personal property. Allot of people who but this way don’t have the best credit. This saves them 4 5 or 6 times what they would have to payThanks Don for your input. You are still landlording with a lease or do you make them do repairs too? I will see what I can find about Jack Shah, I don’t know that name. We also tell them to get renters insurance for their personal property in our paperwork. We also turn them into renters if they get more than 30 days behind payments and will take them to eviction court if necessary.
I still think there is an easier, cleaner way to do Sub 2’s and sell them. I keep trying to learn more and more.
Thanks again Don. Your coaching call regarding Investor Carrot has spurred me onto to getting our website going. We’ve had one for a while but it’s been rather stagnant. I’m encouraged after hearing about your success. Thanks!
Darcy
Darcy,
It is a hybrid deal a lease and a contract for option. First time in at least 15 years I had to take someone to court on eviction. It was this hybrid and judge granted possession. This was 3 weeks ago. Search on here for Jack. He has been on a number of conference calls. Oh yes they are responsible for all maintenance and repairsWhen you buy subject-to, the underlying insurance needs to be cancelled and you need to get a new insurance policy. The previous owners do not own the house anymore so the insurance they have in their name is no longer valid.
At closing, I have sellers sign a document which I fax or email to their insurance company telling them to cancel the policy and send the unearned insurance premium (pro-rated balance) to my company.
I always take title in the name of a Land Trust.
Then I get insurance through my agent. Who bills the mortgage company.
If you do a lease option or sell with a contract for deed or sell the beneficial interest of a trust. you should get your buyers named as additionally insured on your existing policy which is a home owner’s policy policy but does not include contents usually. So your “buyers” need to get renter’s insurance for their contents.
Why are you selling with a contract for deed versus selling with seller financing where they get the deed? Is it to avoid a foreclosure? Beware that many states consider a contract for deed a sale and will still force you to go through an entire foreclosure if they default.
Darcy
Jackie is correct and more thorough in explaining. That is how she taught me and that is how I do it. You should do the same. Also as Jackie teaches give a note and mortgage back to the sellers of the property that mirrors and mimics the underling. It is totally for their protection. Also I would inform your buyers in writing that their is an underlying first with a due on sales clauseJackie,
Thank you again for your clear and concise information. I really appreciate it, a “light bulb” goes off every time I get your advice.
I still have a couple of questions to be able to learn and follow through with Sub 2 transactions.
1) where can I learn how to do a land trust correctly? I’ve heard Randy Hughes webinar about how to use land trusts and I’ve heard some information on CashFlowDepot but I’m not sure where I can get all the specifics. Do I need a lawyer for that?
2) When you cancel the Seller’s insurance that the underlying mortgage is escrowing for and re-bill with your insurance under the name of the land trust, is it Actual Cash Value or Replacement Value and is it a Landlord policy, not a homeowner’s policy? Do you go with a higher deductible or does it depend on the value of the property? Do you have a commercial liability coverage to protect you over all of your properties or do you cover each one individually?
3) We sell with a contract for deed mostly to avoid the hassle of foreclosure. Eviction court is cheaper than hiring a lawyer to do a foreclosure. It’s usually faster too. Missouri is a Deed of Trust state and Kansas is a Mortgage state. Missouri can foreclose pretty quickly but Kansas can be a nightmare. So, yes, we’ve used the CFD as something better than a rental lease but not as in depth as a mortgage or deed of trust. I need to learn about the selling of Beneficial Interest in a Trust perhaps? We don’t want renters.
4) Don, we do disclose the underlying mortgage to our buyers. We disclose as much as we can since we are also licensed realtors in MO & KS. We try to do all the CYA we can so as not to get in trouble.
5) Jackie, is there a class, webinar, book, something that spells out each step for Sub 2 properties like you talk about? I know that I would probably do many more deals if I felt comfortable about the insurance and the taxes and conveyance of title, etc.
By the way, do you treat the extra you make off a Sub 2 deal every month as Installment Sales Income or treat it as a Rental property and take the depreciation, interest, etc like a rental? I think it should be an installment sale but my CPA treats our 3 Sub 2 s as rentals…..Thanks again, you are awesome. Your advice just makes SO much sense!
Darcy
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