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Mastering Contracting Properties for Subject-To Transactions

Hey folks, I’m Grant Kim from CreativeCashFlow.com. Today, we’re diving into one of the most crucial aspects of real estate investment – the nitty-gritty of contracting properties. This is where all your hard work comes to fruition, and where the pen truly meets the paper. So, let’s break down the essential steps to successfully execute a subject-to contract and ensure a smooth transaction for both you and the seller.

Why Contract Presentations Matter

One of the first hurdles in contracting properties is addressing the size of the contract. These documents can seem overwhelming due to their length, but it’s vital to explain to your seller why it’s so detailed. Essentially, you’re not just contracting the property; you’re also handling the financing. This means there’s considerable paperwork involved, combining purchase and financing elements all at once.

Justifying the Paperwork

Reassure your seller by explaining that the first nine pages are standard state forms that anyone buying a house in Texas signs. The additional paperwork pertains specifically to the subject-to side of things and owner financing. This can help them feel more at ease with the size and scope of the contract.

Encourage Questions

Always begin by asking if they have any questions before you dive in. Emphasize the importance of understanding every part of the contract. Make it clear that they can stop you at any point to ask questions or request further reading time. This approach not only builds trust but also ensures that they are fully aware of what they are signing.

Breaking Down the Contract

Parties Involved

Start by going over the basics. Clearly outline the names listed in the contract. If you’re working on a wholesale deal, make sure to include “/or assigns”. This allows you to transfer the contract to another buyer if needed. Transparency is key here, so ensure the seller understands this clause fully.

Property Specifics

Next, cover the legal descriptions of the property, such as the address and the detailed legal description from tax records. Double-check this information with the seller to avoid any discrepancies.

Purchase Details

Now, dive into the meat of the document – the sales price. Outline the total amount, including how you reach this figure. Explain any differences between the contract price and the loan amount clearly. For example, if your purchase price is $100,000, but the actual outstanding loan is slightly more or less, you’ll adjust accordingly.

Explain the earnest money deposit, typically a nominal amount that shows your commitment to the purchase. Discussing the title policy is also crucial. Unlike traditional transactions, you won’t require them to pay for a new title policy since one already exists from their initial purchase.

Loan Information

Here’s a quick list of what you’ll cover:

  • Current Loan Balance: Explain what they owe on their mortgage.
  • Arrearages: Discuss any missed payments or arrearages you’ll cover as part of the transaction.
  • Non-Assumable Loans: Clarify that the buyer does not assume the existing loan.
  • Lender Approval: Mention that you’re not seeking approval from their lender to make this transaction.
  • Due-on-Sale Clause: Reiterate what this clause means and why it’s not typically a worry if payments are made on time.

Closing Date and Option Period

Set the closing date around 60 days out, giving you a window to market the property. Explain that although 60 days is standard, the transaction can close sooner. This flexibility benefits both parties. Highlight that there is a clause allowing a 30-day extension if both parties agree.

Special Provisions

Discuss any unique conditions you’ve negotiated. Whether it’s appliances staying or minor repairs, get everything in writing. This avoids any misunderstandings later on.

Closing Costs

Initially propose a 50/50 split on closing costs. This can serve as a negotiation point, allowing the seller to feel they’ve won something when you agree to cover all closing costs. Also, include any arrearages in the closing costs to make them tax-deductible for your business.

Mediation clauses and other legalities can bog down the process, but a brief explanation can help. For instance, let them know if any disputes arise, you’ll go through mediation rather than heading straight to court. This makes the process fairer and less intimidating.

Seller and Buyer Information

Ensure all contact information is correctly filled out, and make it clear how you’ll communicate moving forward. This helps avoid any mishaps in the future.

Addendum A: The Detailed Breakdown

Right to Assign Contract

Reiterate your right to assign the contract, either within your company or to another investor if the need arises. This ensures the seller knows what to expect if assignment occurs.

Reiteration of the Option Period

Mention the 60-day option again, emphasizing its importance and the possibility to extend if mutually agreed upon.

Subject-To Transaction Details

Explain that you are buying the house subject to the existing loan and will continue making the payments. Clarify that this scenario does not require lender approval, mitigating any apprehension regarding the due-on-sale clause.

Financial Review Option

Let the seller know they have the right to review the financials of the new buyer, although most sellers do not take up this option.

Payment Logistics

Discuss whether you’ll be making payments directly to the lender or through a third-party loan servicer. Explain the cost implications of each option and why you might prefer one over the other.

No Oral Agreements

Stress the importance of having everything in writing. If it’s not in the contract, it doesn’t count, so any promises or agreements should be documented.

Additional Disclosures and Powers of Attorney

Loan Information Disclosure

Ensure the seller understands that the figures in the contract might not be exact and that they will govern according to the actual loan balance at closing. This avoids any future disputes.

Attorney Liability Disclaimers

Explain that neither you nor your attorney is representing the seller in the transaction. Clarity here can prevent any misinterpretations.

Underlying Lien Transaction Disclosures

This is essential to comply with state requirements. Both you and the seller will need to sign disclosures about underlying liens and how they are handled in the transaction.

Powers of Attorney

A power of attorney (POA) helps smooth out the process for handling certain aspects like insurance. Explain that the POA you are requesting is specific and limited to the property transaction. This reassures the seller that you’re only gaining authority for this specific deal.

Closing Steps and Ancillary Documents

Have a clear checklist of the next steps and provide this to the seller. This can include getting notarized documents, submitting required papers, and preparing for closing. A transparent list helps both parties stay organized and on the same page.

Final Thoughts

Clear communication and transparency are key for a seamless contracting experience. Encourage the seller to ask questions and make sure they understand every aspect of the contract. This not only builds trust but also paves the way for a successful, stress-free transaction.

Don’t hesitate to revisit this guide and watch the accompanying video on CreativeCashFlow.com for more in-depth insights. Remember, the more familiar you are with the contract’s ins and outs, the more confident and trustworthy you will appear to your sellers.

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