Subject To Addendum Tutorial How Real Estate Investors Complete the Paperwork

Subject To Addendum Tutorial How Real Estate Investors Complete the Paperwork


– All right, ladies and gentlemen. Let’s talk about the subject to addendum. This is generally used
for a purchase agreement, so we’re getting a little
bit ahead of ourselves. But I know you’re excited about the opportunity for subject to, so I wanted to at least put
this document out there, so you could take a look at
it, get familiar with it. Nothing wrong with using this
along with a letter of intent. Let’s say you’re gonna take a property, you negotiate a property
subject to the existing debt. That usually means the seller’s gonna have a lot of questions. The easiest way I’ve found to get a lot of those questions answered is to simply have them go
through this agreement with them, as somewhat of a tutorial. I fill it all out so it’s all complete, have them all sign it, and then all the questions are answered, and everybody can relax. So that’s said, starting at the top, is basically an explanation
of what’s going on. It says that the seller agrees that the buyer is taking the property subject to the existing
debt on the property. The next section there is it talks about the monthly payments and who’s to make the monthly payments. And if you’re the buyer,
that would be you. It also talks about what the interest rate and the principal is,
and that type of thing. It goes on, covers some
other legal mumbo-jumbo and gobbledygook that we
don’t necessarily need to concern ourselves with. But go ahead and read through it anyway, make sure you’re familiar with it. And then on that first page, the last section is
gonna cover the payment of the existing loan in full, in payment of the seller’s equity. Because, let’s use the $100,000 example. You’re gonna buy a house for $100,000. There’s an $80,000 existing mortgage. You’re taking the property
subject to the $80,000 mortgage. Well, 100,000 minus 80,000 leaves us with? $20,000, this section’s
gonna go into addressing how we’re gonna get that
seller that extra $20,000. So everything is clear and up-front, and there’s no question. So that covers the first page. Next, let’s go down to the second page. Here, it starts getting into the options that you as the buyer have. Sometimes you will sell
it to another property, or to another buyer. And in that case, it will,
language will dictate whether the loan is paid or not. Make sure, ladies and gentlemen,
that the seller understand what happens in the future. You don’t want them to find out, understand that a lot of times, people don’t read these agreements. And it’s important that you go through these agreements with them, so they fully understand
what they’re signing for and they understand
the sequence of events. The last thing you’d want to do is commit to another end-buyer,
sell it to somebody else, have the seller freak out, and the transaction blow up in your face. Best bet is always disclose,
disclose, disclose. Give them all the information they need. Give them this documentation. Make sure they sign it. If they want to have it
reviewed by their attorney, by all means, that’s a great idea. Matter of fact, I even suggest it. I’m like, “Here’s the
subject to agreement, “please send this over to your attorney.” “Have them review it.” “If they have any questions,
they can get with my attorney, “and yadda, yadda, yadda.” Additionally, we talk
about, in section three, non-assumption of the existing loan. It clarifies that we are
not assuming the mortgage, we are taking the property
subject to the existing mortgage. Which really means that
if the event I don’t pay, that seller’s not off the
hook for that mortgage until we sell the house
and satisfy the mortgage, or we refinance the house
and satisfy the mortgage. We wanna be very clear on that. Lot of times, people take what you say and twist it to be what they wanna hear. You say, “Hey, Mr. Seller,
I’m taking the property “subject to the existing mortgage.” Seller hears, “Oh, he’s assuming my loan.” This section three says no,
we’re not assuming your loan. We’re taking it subject to. Additionally, there’s a
release of liability statement. Pretty much a blanket,
boilerplate statement in section four. Section Five is the existing loan, and the seller’s equity,
price, and terms estimated. So it’s very important that you fill in all
the blanks that apply. Now, granted, it has a second
and a third loan amount. In a lot of cases, the
seller only has one mortgage. But in the event they have
more than one mortgage, that’s gonna be addressed here. And go on down the list to make sure that you fill everything out
to the best of your knowledge and those marked as completely
as you possibly can. The next section addresses
what happens if there’s any differences in the loan balance. In other words, if the seller
says they owe 100 grand, and they owe 150,000, it talks about how that will be adjusted. And usually it winds up being a credit to the buyer at closing. The number seven is
the due on sale clause, and a transfer clause. Basically you’re telling the
seller that it’s possible that a due on sale
clause may be triggered, and how to address that. Also, it talks about any
new debt or encumbrances that the seller’s not going
to, that’s in section eight, not gonna take on any new debt. The last thing you’d want is to start paying the seller’s mortgage, next thing you find out, this joker’s out there taking three, four mortgages on his property, and you’ll never be able to buy it, because of all these extra mortgages. So he’s basically signing that there’s no other mortgages there, and they won’t really put
any more mortgages on it. That’s to your benefit, trust me. Interest deduction talks
about who gets to take the interest deduction
for their taxes, right? Both people really can’t take it. Now I’m no CPA, but I
would be very careful with this section. If you’re gonna get
the interest deduction, you better darn sure, make
sure the seller knows that. Because the seller, technically, even though they don’t own the house, they own the debt, right? So they’re liable for the interest. Their CPA may be saying, “No, Joe, you get to take the deduction.” And your CPA is saying, “No, Jim, you get to take the deduction.” And if you guys don’t work
that out in writing in advance, well, guess what’s gonna happen? You’re both gonna take the deduction. Wouldn’t it be unfortunate
if the IRS found out you both took the same
deduction on the same mortgage? For the mortgage interest,
that’s gonna get sticky for you. And you might be looking
at an audit, or fines, or penalties, or the seller
may be in the same situation. Regardless, it’ll turn a good situation, and a problem-solving
situation, into a very bad one that will disadvantage either
you or the seller or both. So to avoid all that, that’s
why this agreement’s here. That said, boys and girls, make sure you sit down with your CPA and they help you clarify where you’re at. If it were me, I would take this document, use it as a boilerplate, but I would take it to
my attorney in my state, wherever I am, and make sure they’re okay with the way everything’s worded. Taking a property subject to, there are laws on the
proper ways to do things, and the improper way to do things. So it helps to have a real estate attorney help you with the paperwork. These forms are intended
for you to be used as templates, subject to,
there’s that word, subject to, review from your attorney. I am not an attorney, and I
am not giving legal advice. I did, although, have an
attorney prepare this documents, however, that attorney is an attorney in the state of Florida. So you’ll wanna run by your own attorney. Make sure your attorney is okay
with everything as it sets. And of course, the last section is just your signature blocks. Make sure everybody signs
off, and there you have it. That’s that. So the subject to addendum is done. (intense music)

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