Subject To Done Right | Caleb Christopher E34

Subject To has been around for decades, but it’s still one of the most misunderstood strategies in real estate. In this episode, Keith sits down with Caleb Christopher of Creative TC to break down Sub2 myths, the real risk behind due on sale clauses, where deals actually blow up, and what “safe, legal, ethical” really looks like in creative finance. If you’re doing — or considering — a Subject To deal, this is the risk management conversation you need to hear.

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Transcript

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One myth is that a trust makes you do on sale proof and it doesn't. For an investor purchase, for a non direct descendant purchase, I'll say for family planning purposes or estate planning. If it's not one of those, it's not protected by the Garn St. Germain Act. So a trust does not protect you from due on sale. I've seen it happen. I've seen them accelerate loans that have been placed in trusts. It can and does happen. oh you Today, we are going to be talking about one of my favorite subjects, creative financing, specifically subject two. And there are a ton of myths and strong opinions about sub two. Some investors swear by it. Others think it's just plain reckless. And Caleb has created a business around making creative deals safe, legal, and ethical. So I'm really interested to hear what he has to say. So. Let's start by just clearing the air. What is subject two? Sub two. I'm going to tell you, every deal is sub two. We'll get to that in a second though. What we're talking about is taking over somebody else's mortgage payment. I buy the house, you give me the deed, you leave your loan in place, and I make your payments. Now, let me explain how every deal is a sub two deal. Cause people are like, well, that's crazy. Why would you ever buy a subject to something like that? When a utility company comes and digs up your yard, they can do that. And you can't say squat about it. Why? Because they own the utilities. Yes, but the utility has an easement or right of way. They do have an easement. So when you bought the house, you bought it subject to... the easements and rights of way of record. So you bought it subject to something. Somebody else can do something to your property without you having any legal recourse. Well, when we buy sub two financially, we're just saying, hey, the existing recorded mortgage that allows them to foreclose if you default, you're buying it subject to that still being there. All the terms and conditions, you're buying it subject to that mortgage. Just like you're buying it subject to the rights of way. for the utility company, the easements for people to cross the edge of corner of your property or driveway that goes through, who knows, but you're buying it subject to all of those things. We just add the mortgage to the list. Okay, so this is where people get scared. And I think this is where there's a lot of false information about subject to, you you hear a lot about do you want sale clause, all these different things, right? So let's clear up the myths. Which sub two myths do you wish would just die? because they're not even an issue and we shouldn't even be talking about it. I think buying it that you can just take over payments on somebody else's it's not even a myth. I think it's just the wrong way to do it. Shoot. I'm trying to think of a myth that I can bust. It's mostly comes down. You can do whatever you want. The problem is you can do whatever you want. Yeah. Again, like you said, I exist as a company. I started a company to make creative finance safe, legal and ethical because it's too easy for it to not be any one of those things. either on purpose or on accident. Okay. So what about this due on sale thing though? Cause let's, let's clear the air on that. Make sub two safe again. There you go. That's I made that hat because, uh, people kept asking me for due on sale insurance. The due on sale clause is in every mortgage. By the way, let me just clarify how a mortgage works. You don't get a mortgage from a bank. A lot of people think that. So if you're out there saying, Mike bank gave me a mortgage, you got it backwards. They give you money. You gave them a mortgage. What a mortgage does or a deed of trust allows, you're basically signing a document that says, Hey, if I don't pay you back, or if I break into these other terms, you have the right to foreclose on this property. That's what a mortgage does. So you, when you're doing a sub two, you've given the bank the right to foreclose on your property. One of the things that's in that mortgage is a due on sale clause. You have signed a legally binding agreement on public record that says, if I transfer the property without your permission, you can accelerate the loan. That means you can call it due. Your next monthly payment's a full payment, baby. Not just the $2,000 a month. It's now $600,000 as your next monthly payment and will be paid off. If you can't do that, then we can foreclose for non-payment. That's the due on sale clause. So what do you do to protect yourself from that? If you happen to get yourself in a situation where you had a sub due, a subject to property and You shook hands, you're going through the... We'll talk about the paperwork in a second. Oh yeah, lots to it. What happens if the bank says, hey, this title just transferred names. We want the balloon payment paid in 30 days. What do you do? As the buyer. Yeah, as the buyer, as the person who owns the property now, you probably order a new pair of underwear and then I would say you call my team because we've fixed it. I don't want to turn this into a pitch, but I'm telling you, there are, there's at least 10 ways to fix it. If you can sell it, you can sell it just be done with it. If you can refinance it, maybe out of pocket, maybe no cash out of pocket. That's great option as well. But to me, those are like fallback, worst case scenario options. Because ideally you got into a sub two deal because you were buying the rate, because you were buying the structure of the deal. You're buying that outcome. You could have gotten new financing. uh but you didn't because you may have overpaid, you may have put more cash in upfront, something to get that deal. And so it's worth more as it is than if you had to sell it off or refinance it. And so sometimes we can restructure the deal. That could be deeding the property back to the seller, which now we have to ask, do I have a decent relationship with the seller? Can I trust them? Are they cooperative? Are they available? Are they alive? You can sell you can deed back to the seller to absolve the risk of the, or to satisfy the bank. And then we can restructure as a lease with an option to purchase, maybe a master lease if you're doing a long-term rental. But what are you doing with the property? Because if you still need the deed or you have other lenders attached to that property, it does complicate things. It usually starts with deeding it back to the seller to get the bank off your backs. But that's not where you want to leave things. You have to have a, you know, a daisy chain of, then we're going to do this and this and this right after. And that's where that's how you restructure the deal. Sometimes it goes on recorded. Can't always recommend that. Yeah. But restructuring, sometimes you place it in a trust, but here's one myth. I think one myth is that a trust makes you do on sale proof and it doesn't for an investor purchase for a non direct descendant purchase. say for family planning purposes or estate planning. If it's not one of those, it's not protected by the garden, garden, St. Germain act. So a trust does not protect you from due on sale. I've seen it happen. I've seen them accelerate loans that have been placed in trusts. It can and does happen. uh Sometimes it's just negotiating with the bank. The smaller the bank, the more likely they are to accelerate the loan because they watch closer and they care more. Then again, you can actually call the bank manager in a small bank and say, you know, you notice how I caught up John Smith's payments. He was 24,000 behind. I brought that to the table and I put the loan back in good standing. Okay. And for the last eight months, I've been making the payments. You're in good shape because of me. Can we just not do this? Well, we got policies. All right. Your policy is to spend the money to foreclose on a property that's performing. Is that the policy? And so we can have that discussion in a small bank that you can't have at a big bank. That has succeeded once. One time I said, hey, can you guys just not? And they're like, you know what? We're going to leave this alone. But if you miss payments, we're coming back to this. OK, cool, fine. Fine by me. But you can't get rid of the risk of due on sale. They have the legal contractual right to accelerate the loan. And if you don't pay them off, they can foreclose. That sounds pretty scary. And I'm sure a lot of people are listening. like, do I even want to go down that path? Is it even worth it? That's a good question. I mean, if you can't take the heat, stay out of the kitchen. It is an incumbent risk when you do this type of deal, just like when you drive. You're at risk of. getting in a crash. Can you put on a seatbelt to reduce risk? Yeah. Meaning can you structure the deal in a way that's less visible or has better protections for reactive responses to? Yeah, you can reduce risk all day, but you can't eliminate it. Okay. Um, well, I mean, you also can't eliminate a tornado ripping through your neighborhood and taking your home away either. So like life has risks. You can't. You can't. And so, so let's kind of, let's back up the truck a little bit because I know you've created some businesses to protect people when it comes to sub two and making these types of deals easier. uh But how did you even get into this? Let's talk about like why you created these businesses in the first place. What led you to that? It's funny, lately I've been thinking about that Batman character. I think it's Bane, the one with like the black little breather mask. And he's like, you only adopted the darkness, but I was born in it. And I just started a title company. And that's how I'm thinking as I look at other title companies, because I came up learning about, I read Rich Dad Poor Dad, that's the beginning of my real estate journey, like everybody, you know, that's not unique. Went to bigger pockets, that's not unique. Then I found creative finance real estate and I got into wholesaling specifically to underwrite creative deals and close them because it was interesting to me. And I like helping people. And a lot of times, we're helping somebody out of a pretty bad situation. I like that. So my first deals were creative deals. So I was born into that. And that's when I saw It's pretty easy for people to do each other dirty either on purpose or without even knowing it just because they don't understand stuff. And so that's where I created the first company Creative TC, which is transaction consulting. Hey, I've seen and touched a lot of stuff. Oh, that's weird. Let me see and touch yours. Nope, that's not the tagline. I've seen and touched a lot of creative deals. Let me help you handle yours. And that's what that was all about. help you make informed decisions. But that also means let's make sure we have the right conversations with the seller because they're leaving their credit on the line. And that's no light matter that needs to be discussed. as far as your TC business that you created, um how would that work? Do you basically handle the um conversation between the seller and the buyer and the paperwork and everything in between? You facilitate that? it's understandable on both ends. Is that the value proposition that you're bringing to the table? Yeah. Now somebody's going to be our client who gets our primary focus and care and they're the first ones to be communicated with. But if we find that there's something unethical happening, we're going to give a heads up, but we're going to shut it down. Okay. We're not going to be involved in this. I'm happy to give you your money back, but I'm not letting that guy go into this deal on a wares. I'm going to tell him you can tell him and we can continue or we can separate and I'll go tell him. but he's not doing this transaction without understanding all the facts. And so we facilitate a lot of that communication. Yeah. But most of the time people are coming to me with a verbal agreement. We have a contract write-ups drive-through, right? If you were talking to your neighbor, Keith, and you're like, Hey, my neighbor or my friend wants to sell me his house and leave his loan in place. I'm going to give him an extra 20,000. Somebody did this a couple of weeks ago, a couple of months ago said, Hey, I'm going to give this guy an extra $50,000 because he's got a 2 % rate. He's my friend. How do I do this right? I want to be protected. I want him protected. We have the general agreement of what was supposed to happen, the outcome. Can you help me structure that? Yeah, let's get on a call. We'll talk through through. And my contract specialist, full-time dedicated person will help you put it on paper. And then you can go take that to escrow. So some people engage that way. And we help a lot with just making sure you understand what you're getting into. A lot of times people will bring me an already signed contract. The seller's already under contract here. But I've never seen somebody sue for specific performance with a seller on a substitute. Like you're going to go to court and a judge is going to say, yes, seller, you have to leave your credit on the line. You're under contract. I don't think that's going to happen. you know, they bring me a signed contract, but it's like, yeah, you're mostly agreed, but let's polish things up and make sure that the agreements are solid, that the acknowledgments are there, that the seller can explain in their own words what's going on. And if they can't, let's ask some questions. What are the risks? What questions should you be asking? I want to make sure that you understand what you're getting into and that you're trading something. Your credit stays on the line in exchange for what? Avoiding a foreclosure, getting more cash at close. One of these things is usually happening, if not more, multiple. So there is a value proposition. Let's look at a VA loan. If you just bought a house with a 0 % down, you don't have any equity. And if you wanted to sell, to sell would cost you 10, 20. Yeah. Maybe up to $50,000 or more. So if you're a veteran, active duty or whatever, and you get new orders right after you bought a house, ouch. Well, what if Caleb comes and says, not only do you not have to pay $50,000 out of pocket to use a realtor to sell your house, I will give you $10,000. That's not a $10,000 profit. That's a $60,000 profit. You're effectively getting the benefit of $60,000, not paying 50 plus 10 on top. then I'll take over the property and use it as a rental. Is that a value proposition? It depends on your, you know, your own situation. Maybe for some people, nope, I'm not letting anybody else have my credit score. If you don't make payments, it hurts me pretty bad. Not worth it. That's fine. It's not the right deal for you. But we want to make sure people understand that. So you're asking what we do. It's those sorts of conversations, that sort of explanation, continued post close support. We do, we'll handhold you through the whole thing. It's practically a mini mentorship. I just don't want to run a community. Got it. And so they're paying you to basically be the transaction coordinator for the whole thing from start to finish. Yeah. And I would say there's a lot of coordinators out there. I'm going to differentiate. Coordination is a base level thing. You're an administrative assistant, which has some value. A consultant is bringing more to the table. It's the active consultative, making sure things are set up right and people understand things. And my philosophy is not to nickel and dime. If you're using me and I've got the docs you need, they're yours. And so we have upgraded templates and documents. I've seen other people's docs. They use them because they're templates that you're supposed to use. I'm actively editing and versioning these things. And I use an attorney to review them periodically. So there are title companies using my documents now. They're like, your docs are better. I use yours. Nice. So if you have a deal, they could just contact your company and you will help them. to close this thing. Yeah. So we'll help you find the right title, a creative friendly title company. Because if you use the wrong title company, can blow up the deal too, or closing it. So we'll help you find one that is good in your state. We maintain a database of those. They come and go. If the escrow officer changes or removes companies, this company is not friendly anymore. So we don't use them. So we maintain that. So finding the right company, communicating, bringing the right documents to closing. uh making sure again that it's safe, legal and ethical and that you're protected for the long term. Title companies are not actually allowed to advise in your situation. So they really are just supposed to follow your instructions and close the deal. Which was why when I did my first deals, I was like, who's here to help people not screw each other? I thought the title company was going to I thought they were the authority. Nope, they're supposed to remain an independent neutral third party. So and their job ends at closing. At that point, they're like, hey, you sign Closing Docs, my name's not in anymore, go figure it out. And I thought that was really rude, but I get it now that I own a title company. I'm like, OK. I mean, they could have delivered it a little better, but technically, they're not supposed to be meddling anymore. So let's talk about that, the evolution from you started the TC business, you're helping people do these sub 2 deals, these creative deals. And then you saw that, man, these title companies are They don't know how to handle these sub two deals half the time. So why don't I just create my own title company? is it, can we use like, can someone use that title company in all 50 states or is it? I'm just in Colorado right now. Just in Colorado. Okay. So for my co, what about your TC services nationwide? yeah, nationwide. Okay. So if we're listening and you have a sub two deal, you definitely want to get ahold of this guy. And if you're in Colorado, he can. It sounds like you can help them from start to finish. yeah, the whole kit and caboodle. Yeah, nice. We do a lot with private lenders as well who are doing second and third position liens or other private lending. OK, so anything like that we can bring to seller financing deals. Yeah, I mean, as general as you said the audience was, real estate investors is who I can consult for. OK, that's awesome. um I think that's really a missing piece because I know I've talked to a lot of investors that were like, Hey Keith, I'm interested in doing this sub two deal, but I don't really know what paperwork I need. And you know, maybe the realtor that I'm working with has no clue or whatever. But I found the seller. I just need to put it together and I don't know what to do. And I don't want to spend $10,000 to sign up for some course to learn how to do sub two deals. This might be my only sub two deal I ever do. That's right. uh The other side was if you wanted to do that and you found someone, it used to be that you would have to JV and give them 50 % or more of the deal and you lose control of the deal. And a lot of times what I found in that case was people who were doing that JVing with others to get the deal done, two thumbs up because you're getting the deal done. But those people end up being protectionist and they don't provide you access to like, I JVed with you so I could learn. Not so you could take 60 % of the deal and shut me out and only. like pay me a lead fee. That's not what I wanted. And so I saw a lot of people disappointed by that. And I just thought, can't we just make this transactional? How about it stays your deal? You pay me to help you do your deal. It's your deal. don't even, I don't want the entanglement of JVing. I've learned it didn't look very attractive in the first place. And then when I've done JVs, yuck. People are messy. It's clean to have separate, just, hey, let's transactional do this one at a time. Yeah, I love how you created a business around this to help people and you're making sure that, you know, both the buyer and the seller are legally protected to the best ability that you can do, right? Yep. Yeah, that's cool. You know, there's a couple of closing attorneys, several in the state of Texas who are fast and lean and mean and they can get stuff done with creative deals. They're very competent. I'm reading a closing packet for a client. And it contains a waiver of title insurance. A waiver of time. You got to sign a waiver of time. What for? I called, this was in my early days when I was just starting the company, right? As I'm exploring and learning this stuff, because I like to learn anyways. And I'm like, what is this for? They said, well, we don't provide title insurance. Well, what if I want it? We don't provide it. We just close files. So you're telling me, hold on. I know you close dozens of files a month, sub two files per month. And you're telling me that none of these have title insurance? That's scary. Right. And I called a couple of past clients, new clients who had used them in the past before me. And I said, you know, you don't have title insurance on those seven deals you bought? What? Yeah, you didn't read the closing packet, did you? What do mean? This closing attorney, multiple closing attorneys in Texas, they don't provide it. They just close the deal. What do you mean? oh And so it's looking at that stuff. that we bring to the table. That's that's that I mean, that's a real service. And uh I commend you for it. It's crazy how and I just had this conversation the other day, how in real estate, whether you're, you know, buying rental properties, doing flips or whatever, you often find a hurdle that you yourself have trouble getting over. But oftentimes when you figure it out, It's a business opportunity because you're like, you know, everyone's going to hit this hurdle. Yep. For me, Creative TC is an overarching brand, like a family of companies. The first one is transaction consulting. The next one is title company. The one that is yet to come probably is transaction capital or training company. One or both of those is in the near future, but they all operate under the Creative TC brand. Well, Caleb, I do appreciate you coming on. If someone wants to structure deals safe and legally, where do they connect with you? We have free 15 minute consults. I want to be the lighthouse. So it's creativetc.io. You can book a free 15 minute consult. You're welcome to ask my people, is this even a deal? Should I do it? We want to help you make sure that you're getting into a good deal as well. That's awesome. Everyone out there just listening. If you're doing a creative deal right now, and you have questions, you wanna contact this man, I'll be sure to put links on this podcast as well. uh Thank you so much for joining me today. Everyone out there, we'll see you next time. God bless. All right. um