Subject2

From CaseyPedia

Subject2 is short for Subject 2 existing financing.

This is one of the acquisition strategies for people that routinely use the "We buy houses", and the "We buy ugly houses" yellow signs that you see handwritten on the side of the road.

The process is as follows:

People look for motivated sellers (out of state owners, pre-foreclosures, divorce, people behind on mortgages).

They contact them under the guise to help them out of their situation.

They come in and get the house for either what they owe on it, capitalizing on the FMV (fair market value) minus the amount owed, or the difference is so tiny that it dictates their exit strategy.

They have the sellers deed the property to a Living trust (Illinois Land Trust, Intervivos-revocable trust).

Note this is not a sale at this point and it does not violate the DOSC (Due on Sale Clause) that the original lender has in the mortgage documents.

Then the ES (Equity Skimmer) has the sellers do an assignment of beneficial interest (violating the DOSC) to the trust and this takes the ability for them to use the payment interest as a tax writeoff. This assignment of beneficial interest is then transferred to the new buyers so they can utilize the tax writeoff. When the Investor/Equity Skimmer comes in they force the seller into a material breach with their lender exposing them to possible litigation and collection activity.

There has been debate as to when this triggers the DOS clause, because just deeding the property to a trust does not trigger the DOSC. It is used as estate planning to transfer ownership without probate upon the passing (death). Many ES's try to get around this by keeping the sellers with 10% beneficial interest in the trust.

Generally the ES has the trustee of the trust be a family member, attorney, or someone else close that they can control. Upon death of the sellers, the property passes to the trustee.

Trusts have been recommended by many gurus to be called something like "main street orphan trust, or similar" to throw potential litigious attorneys off by public ridicule for suing the orphans.

The EQ then sells the home to a buyer and all of the paperwork is processed (and none of it is recorded with the exception that the home is now in a trust).

This in essence makes the EQ "THE BANK", and it is at it's bare bones just a wrap-around mortgage that skirts all the legal exposure.

EXIT STRATEGIES

Either they bought the home for what was owed, making their profit the FMV minus what is owed.

Or they get someone that is at 100% owed of the FMV or above.

They make their difference by relaxing their credit criteria and getting someone that cannot gain conventional financing and has a good sum of money to put down.

They get a premium on the home price (can be as high as 20% above FMV) since the buyers have shoddy credit, unverifiable income, or simply cannot get traditional financing.

This strategy is under scrutiny by many Government agencies and is starting to see some people prosecuted for it.