Let me start by saying that I am not an attorney and my intention is not to render legal advise in this article. Instead what I’m offering is my experience, and it’s pretty vast. Naturally, you should seek your own legal council relating to your business. Ok, with that said…
Doing a subject to deal refers to taking over the deed of a property subject to the existing mortgage on a house. It can be a confusing area, and sometimes you’ll even be told that it’s impossible or even…illegal!
Hear me now… it’s not illegal, but you do need to tread lightly.
So, in this post, I want to talk about the 1 thing you should absolutely NOT do on subject to deals and I’m sharing some other interesting info as well.
Let’s get to it…
Behind on Payments or Facing Foreclosure
Be careful if you are taking the deed from someone who is behind on their mortgage payments or facing foreclosure. There are a few states that are a little funky about that.
This is due to the “foreclosure rescue” industry that sprouted up back in 2007 and 2008 during the crash.
At that time, legislators were saying, “Well this person is giving away a lot of equity. That doesn’t seem right.” But, you know what… that’s because the buyer probably made up months of unpaid payments. (It seems to me that legislators just clog up every pipe they go near.)
So be cautious of sellers who are in foreclosure. You’ll want to know all the ins and outs of the laws in your particular state before you proceed.
The Big NO
In every case…in every state…whatever you do…
If you take a deed from someone in foreclosure—no matter how much they plead—do NOT lease the property back to them and let them stay.
When you take the deed from the seller (actually whether they are in foreclosure or not) they have to move. They have to leave.
If they refuse to get out, do not do that deal. Plain and simple. I can’t be clearer on this matter. Walk away. It’s simply not worth the troubles that could come along with it.
This should seem obvious. Think about it…
If they’re not paying the lender, why would they pay you?
Believe me, some sellers will do a brilliant job of trying to convince you why you should let them stay. They’ll say things like, “it’s their home, and they’ll figure all this out and be able to pay you”, and on and on and on…
But know that most issues with subject to deals are rooted in “leasing back to a defaulted seller.”
So, that’s the big NO when doing subject to deals. They must leave!
My Favorite Kinds of Subject To Deals…
My favorite subject to deals are when the seller has already left.
In fact, they might live in another state. That’s what I look for.
This does also mean that they could be hard to reach. In this instance, I use a tool called Real Estate Skip Trace to locate hard-to-find sellers; a fast, reliable system that does the hard work for me – click here to try it out risk-free!
Or perhaps it’s a burned-out landlord. That’s one who’s not going to and probably never did live in that house. Just the thought of living in it makes them want to puke, LOL.
That is my kind of subject to deal.
Perhaps subject to is a strategy you might consider adding to your investing business. Just remember – the seller must leave in order for you to move forward with the deal.
What About The Due On Sale Clause?
So, at the very heart of every subject to deal, we receive the deed and take over (not assume!) the underlying loan. In some cases we make up back payments, if it makes sense, and in all cases we start making the payment on the seller’s behalf. This clearly violates the “due on sale” clause that’s in most every mortgage because a “sale” has taken place and the underlying loan was NOT paid off.
Put another way, this is a violation of a clause written into the “contract” or agreement between the lender and borrower. This is not a violation of some law! It’s a violation of the terms of the agreement, and..it probably won’t matter.
The lender will eventually discover that the D.O.S. clause has been violated, probably when they get the new insurance declaration showing you, or better, your entity as title holder and them as additional insured. You need insurance and if the lender is not made aware of the coverage, they’ll bind coverage on your behalf at roughly 3-5 times the normal cost. So don’t let that happen!
So now that the lender knows, what will they do? Probably nothing because after all, the payment is being made faithfully every month – by you – so all is well really. If they do anything, it will probably be to write you a letter saying that the D.O.S. clause has been violated and they want the remaining balance of the loan paid without delay. I simply would ignore it and keep on making the payments because… and this is important… their only real recourse is to foreclose.
Yeah. So go through all the legal rigmarole and expenses to foreclose on a loan that is current and in good standing? I don’t think so, at least not in the current lending environment.
So stay calm and pay on.
What’s Been Your Experience?
Have you had experience with subject to deals that you’d like to share? Ever heard from a bank on one? I, and other readers, want to know! Please leave your comments below.
Regards,
Cameron Dunlap
Thank you, this was a very good way to explain this! Have a great day!
Thank you Cam to sharing that fantastic information.!!!!
I was always been concern about it. Now I feel more comfortable jumping in one deal when makes sense.
By the way if ever will happen, (but as you said is not like it), how much do they will charge you? Any idea?
We just discussed this topic at our NOREIA Mastermind meeting last night. One of the investors did exactly what you said not to do. He felt bad for the “little old lady”. We all said we hope it doesn’t come back to bite him.
Thanks Cam. I had forgotten about making sure that they leave the property. But, I like your approach of dealing with Subject 2 owners that are out of the area. The likelihood of them returning to occupy the property would seem remote. I always tell them upfront that they will still be on the mortgage, the goal is to preserve their credit and at sometime in the near future (24 months usually time to find find a buyer. I do’t say anything about buyers), the note will be paid off removing their name (s) from the mortgage.
Yup, I did quite a few Sub 2’s during the 2000’s, and not once did the lender bat an eyelash.. They are just happy that the loan was brought current.. i.e. became a “performing” loan on their books again.. and that someone is making the payments on time. It’s really a non-issue, so I wouldn’t let that slow you down at all. As a matter of fact, I am currently marketing to people in pre-foreclosure on their mortgage AND to people who have tax liens on that property (sometimes BIG ones!), and are headed for Tax Foreclosure Sale at the county in a few months, due to unpaid property taxes.. These tax sale properties are a little known gold mine.. few, if any, investors are contacting these homeowners prior to the tax sale. Typically, investors who even know about tax sales are waiting until the sale itself (when properties often get bid up a lot higher than the amount of taxes owed).. but I can nab them prior to that, if the homeowner will work with me on a Sub2.