In this post, I dive deeper into the essential documents that you’ll need for a Subject To deal, and some of the clauses that you should insert into the contracts to help protect you.
If this is the first part of this series on Subject To that you’ve come across, you might want to also check out Parts 1-3. Here’s a summary of what I’ve covered so far:
What is the Subject To Real Estate Investment Strategy? Provides a thorough explanation of exactly what Subject To investing is, and how you can both make money with it and help homeowners in distress.
The Benefits and Risks of Investing in Real Estate Subject to an Existing Mortgage Covers the benefits and risks of Subject To transactions that you and your seller should be aware of, including the due-on-sale clause.
The Steps to a Subject To Real Estate Deal Breaks down the steps necessary to a successful Subject To real estate deal, from verifying seller facts to the closing.
As with most things involving the law, the basics of contracts would take up several chapters, so I’ll only briefly cover the documents that you may need, and the clauses that you may want to have in your contracts when performing these transactions.
Let’s start with defining the documents that you’re most likely to need throughout the process and at closing.
The Documents Used in a Typical Subject To Transaction
This list is not inclusive of all possible forms, and your state or county may require more or less forms or they may be named differently.
As a good starting point, you can get a list of forms and documents required for a typical real estate transaction in your state from US Legal Forms.
Once you have the basic contracts to ensure a legal transfer of property, you can add your own amendments and clauses specific to the Subject To transaction.
I recommend that you always have your Subject To contracts and documentation looked over by a real estate attorney in your jurisdiction.
Some of these documents are for your due diligence, some will be required for closing, others will be recorded, and some are simply for your records.
Most documentation will need to be signed by the sellers, some will need to be notarized and others just witnessed. It’s most efficient to try to get all paperwork done at the same time, for example by having a mobile notary come to a central place where you and the sellers can meet.
Third-Party Authorization to Release Information
As mentioned in the last post, the steps to a subject to deal, you’ll need this signed form to perform basic due diligence and verify the information the seller gives you regarding the status and terms of the mortgage and payoff amount.
To find this form, just search online for it using the words “Third-Party Authorization to Release Information” + lender’s name.
You should have your seller sign this form as soon as possible, either using an online tool such as DocuSign, or in wet ink on your first visit to the property.
Purchase and Sale Agreement
The terms of the purchase are laid out in this contract. Typically you or the attorney setting up your Agreement will want to add, at a minimum, a Subject To section with some variation of the following verbiage, “This agreement is subject to the existing mortgage”.
In the next section of this post I’ll talk about the most important clauses to include in this contract.
Federal, State, County & City Disclosures & Pamphlets
Each property may be subject to disclosures required by every level of government from the city, up to the federal level. These are mandated disclosures between the seller and the buyer. Some are actual disclosures, others are information pamphlets.
These can include:
Lead-Based Paint Disclosure & Pamphlet
This disclosure is required by the federal government for any residence constructed before 1978.
Natural Hazard Disclosure
States like California require this report, which provides information on official hazard zones affecting the use of the property; shows any specific property taxes and assessments, and environmental hazards in the area.
Seller’s Property Disclosure
This will be the seller’s disclosure of all of the defects of the property.
California requires that buildings have the required smoke detectors in each room, and that they comply with certain earthquake bracing requirements. Other locations will have similar compliance requirements.
Military Ordinance Disclosure
The seller must disclose whether the property was within one mile of an area previously identified as used for military training purposes, which may contain unexploded ordinances.
Industrial Use Disclosure
The property might be affected by nearby industrial activity such as airport noise, industrial smells, or safety concerns.
Notices & Disclosures of any Supplemental Taxes
These may be local taxes and levies on properties to finance public works and services.
Any Local Disclosures
These could be disclosures such as specific ordinances affecting the use, restrictions, and or taxation of the property.
Due on Sale Disclosure
You will add this disclosure, or if you choose, an addendum in your Purchase Agreement, to clearly explain to seller the risks in agreeing to sell the property Subject To their existing mortgage.
Specifically you want to disclose that the lender may call the loan due at any time and that you make no guarantees that you will pay the remaining balance due should that happen.
Affidavit of Liens
In this document, the seller lists any and all liens on the property, whether officially recorded or not, that they are aware of.
Affidavit of Marital Status
Records the marital status of parties to the transaction. This is especially important with separated spouses, to ensure that the Subject to sale has been approved by all parties to a marriage.
This document will be filed with the Recorder’s Office or County Clerk in the county that the property is located in, and places your name on title to the property.
Notification to Lender (If you choose to notify the lender)
This form is essentially notice to the sellers lending institution that:
- You are taking title to the property and/or
- There has been a change in address to a land trust address or into your name or your business name.
Limited Power of Attorney for Real Estate Transactions
This document allows you to sign documents regarding the property — and only the property — on behalf of the seller.
Important Clauses to Include in Your Purchase Contract
Now let’s talk about clauses that you should add to the purchase contract to protect yourself or give yourself rights by the contract.
Of course, I am not a lawyer and this should not be construed as legal advice. Instead use this as a starting point for you to have your own conversations with your own real estate attorney.
Clauses in a contract basically spell out specific actions that must be performed, and what the seller and the buyer are specifically agreeing to, such as who is financially responsible for what, and within what time period.
Subject To Clauses
There are a number of essential clauses that you’ll want to include in your purchase contract that are fairly specific to Subject To:
Subject To existing financing
List the mortgagee and the mortgage amount that you determined with your authorization at their lending institution.
“This property is being purchased “Subject To” the current existing mortgage owned by [seller’s mortgage company].”
Total purchase price
Statement that you are paying X amount for the property and that if any additional mortgages, liens, judgments, or other come up on the property the seller is responsible for them.
“Buyer will pay a total of no more than X dollars for the property. If any additional mortgages, judgments, or liens, mortgages attached to property as of the time of closing, it will be the responsibility of the Seller to pay these amounts.”
Seller will receive X at closing or if Seller negotiates a payout, when that payout occurs and as a result of what event.
“Buyer shall pay the balance of the purchase price agreed to, amounting to X dollars, within X years of date of closing. Seller will receive approximately X dollars, on or before [date].”
“Seller will receive no cash at closing.”
Seller comfort clause
If you choose to do so, have a clause stating that should the buyer fail to pay on the mortgage payments for X amount of days, the seller can ask for the property to be returned. This gives the seller assurance that they have some control over their credit risk.
“Buyer is purchasing the property “Subject To” the existing mortgage. In regards to that mortgage, should Buyer fail to make any payment due, and should Buyer continue to fail to make the payment for more than thirty (30) days after the due date, upon written request from Seller, Buyer will convey the property back to the Seller.”
Other Important Clauses to Include
Especially important to wholesale investors who may want to assign their Sub 2 contract.
“Buyer may assign this Agreement.”
Alternatively, you can put after your name on the contract, “and/or assigns.”
If you are marketing the property to other investors, then make sure the seller is abundantly clear on that.
“Seller agrees that property may be marketed to other prospective buyers. Buyer may place signs on the property or use any other advertising method at their disposal.”
Access to Property
Seller will allow buyer access to the property during reasonable hours for the purpose of showing property to prospective buyers.
“Seller agrees to provide reasonable access to the property upon request or with [X] notice, prior to closing, for the purpose of showing property to prospective Buyers.”
If sellers are required to leave by the closing date, or some other date agreed upon, you should have that stated in the contract. Don’t forget to detail the condition you agreed the property will be left in, and/or what happens if the sellers have not vacated by that date.
“Upon closing or [insert date] Sellers will be required to vacate property, and such property will be free of debris and in broom clean condition unless otherwise agreed upon by the parties.”
Earnest money clause
This clause states what happens to your earnest money deposit if you decide to exercise any of these clauses and decide not to move forward with a property. Ideally you would want to get every penny back.
“If earnest money deposit or payment to Seller be given, Buyer shall receive a full return of any earnest money deposit or payment to Seller, should Buyer exercise any contingency.”
Acknowledgement Clauses to Ensure Full Disclosure
Make sure you add a section in the contract that spells out for the seller’s acknowledgement that you are expecting to make a large profit on the property.
“Buyer is purchasing the property with the intent to sell, lease, or rent such property for a large profit.”
These acknowledgments should be included and signed by seller:
- Acknowledgement that the underlying loan will remain in seller’s name and on seller’s credit
- Acknowledgment that loan will not be paid off at closing, but will be paid monthly to lender by buyer
- Acknowledgment that lender may call the loan due in full at any time, if lender documentation contains a Due-on-Sale clause
- Acknowledgement that should the Due-on-Sale clause be enforced by lender, lender has a right to call loan due immediately and may force foreclosure
- Acknowledgement that should the lender force foreclosure, a subsequent Notice of Default will appear on seller’s credit report
- Acknowledgement that should the lender force foreclosure, buyer’s title will be extinguished (all rights to the property will become non-existent)
Details, Details, Details
In addition to the preceding clauses, with Subject To transactions you want to include in your contract exactly every detail that you negotiated in clear language, as well as seller’s loan information, for example including these if applicable:
- Your offer price
- Closing date – make this “on or about [date]” for the most flexibility, or “a date not more than 30 days after the expiration of the [inspection period, appraisal, etc.], or such other date mutually agreed upon in writing by both parties.”
- Title company or closing attorney named by buyer
- What will be included (and not included) in the sale in terms of fixtures and personal property — it would be easiest to specify that if not specifically excluded, then it is included in the sale
- That escrow is held by buyer’s attorney, title company, escrow agent, or another party named by buyer
Specific to the financing:
- Loan payoff amount
- Monthly mortgage payment amount
- Interest rate of loan
- Taxes and insurance, if applicable
- How many months negotiated for buyer to pay the monthly mortgage, if negotiating for the loan to stay in place for a number of months or years
- Details as to when buyer has to pay off mortgage
If it’s not in writing and not included in your agreement, then it never existed, so you must be sure to include all possible clauses. Keep the language simple and make sure you know what every clause means so that you can easily explain it to the sellers.
Since clauses are virtually unlimited in scope, and unique to every property and seller, getting your contracts drawn up by an attorney is worthwhile; your lawyer may suggest additional protective clauses that you haven’t thought of.
In this post I listed many of the essential documents that you’ll likely need to enter into a Subject To real estate transaction. I also explained and gave examples of important clauses, some specific to Subject To and others that are protective for you and even the seller. You can use these to draw up your contract, get it double-checked by a real estate attorney, and be well on your way to profiting with your Subject To investing strategy.