Legality of the 'subject to'
It's my understanding that if I do a subject to deal I am not legally responsible for making mortgage payments, however, I am morally responsible to keep my word. Having said that, how can I convince a seller that this is an arrangement that she can be comfortable with. Is there a standard form that those of you who do these deals use that would help ease someones discomfort with this type of deal?
Thanks in advance
You want to check with your lawyer on this one. I am not a lawyer, but in my lay opinion you do have a contractual obligation to make the mortgage payments on the property you took "subject to". If you fail to make the payments, I suspect the seller could bring a civil suit against you, and would prevail.
In the subject to transaction, you do not have an obligation to the lender since the seller still retains liability for the loan. Your obligation is to the seller.
Check with your lawyer.
Thanks Dave!
-andrea
YOU KNOW THAT GOING AGAINST THE ADVICE OF EVERYPERSON IN THE USA AND NOT INCLUDING THE SUBJECT TO LEAVES YOU NO OPEN DOOR OR WINDOW TO NEGOTIATE...
YOU DO WHAT YOU FEEL IS BEST BUT BE REASONABLE WITH YOUR SALE ADN THE SELLER THEY ARE PEOPLE AS WELL...AND WE ALL HAVE TO LIVE TOGETHER UNDER ONE ROOF WHEN IT COMES TO REAL ESTATE...
GOD BLESS
SHAYSHAY
If you purchase a piece of real estate and ASSUME the loan, which is what you are doing by taking the property "subject to" an existing lien.....you are liable to pay it. If you are in a Deed of Trust state there may be a "Due on Sale" clause that says if the property is sold, all sums will become immediately due. Usually, if you continue to make the payments the do not exercise this option. But, if you decide not to make the payments... ... the lender can call all sums due and start foreclosing the property!! The "subject to" is just showing what other items are of record on that property. Make sure you contract an attorney that specializes in real estate law!!
KAZOR,
Glad to meet you.
I don't know how many Subject To deals you have done, but I am not familiar with your way of doing Subject To deals.
Would you kindly explain to me how you arrived at the advice you are given to the community here at TCI.
Welcome on board this board, just a simple explanation would suffice.
John $Cash$ Locke
Hi Kazor,
Thanks for responding to my post and welcome!!
You don't literally assume the loan in a subject to deal. It remains in the name of the person who originally applied for the loan. You just take over the payments. Is that what you meant?
-Andrea
Andrea, nice talking with you. What you are saying is correct. The loan remains in the original borrower's name, but new purchaser is to make the payments. Foreclosure would be on the property, not the person. Thanks for questioning.
$Cash$, nice talking with you also. I see your name all over this site! Vestor directed me to this sight today. A Great resource. I hope I was giving information to the correct topic. If the "subject to" you are talking about is the same as the one I am talking about, it is taking title to a property subject to any liens, judgements, any other encumberances that may affect that parcel. I was specifically addressing the question of whether the new owner is responsible for existing loans. That answer is yes. Foreclosure would be on the property, not the individual. Of course, the original borrower's name would be mud after that. Assuming that no prior assumption approval was given by the lender. If I am totally off base, please let me know. Thanks.
First off, I'd pay close attention to what Mr. Loche says. He is the expert of Subject To here at TCI.
With that said, let me tell you what my attorney told me:
Me: "Are you familiar with Subject-To deals where I acquire the property subject to the existing financing remaining in place"
Lawyer: "Yes."
Me: "Is it legal?"
Lawyer: "Yes"
Me: "What about the DOS clause? Will I get screwed by this?"
Lawyer: "You will only have a problem with the DOS clause if you don't make timely payments. However, just because you do a Subject-To, that does NOT mean you can walk away from your obligations. If you fail to pay the mortgage, yes the lender will go back to the original seller - the person's name who is on the loan. And that seller can sue you. So don't think if things don't work out, you can just walk away. You will still be held accountable."
If you are unsure about the "legality" of Subject-To's, go see an attorney. Maybe two.
Ho....
Hi Ho!
Yes I'm familiar with Mr. Locke. I have recieved lots of counsel on the subject to method (my dh took John's course in LV), and I am very comfortable with the information I have recieved from my dh and our attorney.
Thank you so much!
Andrea
KAZOR,
An astute Subject To investor would not take a property unless the property was free of any leins, judgements or encumbrances other than the existing loans on the property. This is part of the due diligence that I require before making a comittment to purchase the property.
"Subject To the existing loan staying in place", is the proper explaination of Subject To investing.
The probability of the original property owner suing you is highly unlikely, considering you should have the proper paperwork in order when you did the deal.
You just had me pondering how you did your deals when you said the loan was assumed, guess it was just a typo.
There is a big difference from doing title searches to actually investing creatively the Subject To way. However, I will say that title searches are a very important factor in any type of investing, investors do not need any surprises when it comes to clear titles at re-finance time.
You can probably give some very valuable tips to the community here at TCI about title searching, this subject comes up from time to time.
John $Cash$ Locke
Cash, I can only assume that title insurance, or at least a Condition of Title Report, is being acquired on these properties since you are talking about "Subject To the existing loan staying in place," and that nothing else is going to be Subject To. Distressed sellers could have all types of liens and judgements on the way. Not that that matters after the deed has been recorded.
I was not using the "assuming" word literaly. When you aquire the property Subject To you assume the payments not the loan. I don't think there is a debate there. However, I'm not sure what you mean by "There is a big difference from doing title searches to actually investing creatively the Subject To way." I do both. I am a Consultant Title Examiner by day, and beginnig real estate investor and business owner by night.
I really appreciate all the input you provide. This is a great location for beginners to talk to highly experiance investors like yourself.
P.S. I was not the one that brought up the possibility of being sued. I think you were directing that towards Ho.
<font size=-1>[ Edited by KAZOR on Date 02/12/2003 ]
Hi KAZOR,
I’m always open to learn something new. What exactly is a Consultant Title Examiner?
Thanks in advance of your reply
John (LV)
John, I sent you a private email explaining. Thanks.
Kazor,
I do agree with everything you said, and would like to add,
A Sub2 isn't a quiet way to assume a non assumable loan, because the bank will be notified of the sale by the title/escrow company.
Meaning you can beat you A _ _, they'll show up for the closing. And when that happens they'll accelerate the loan demanding payment in full.
Your best bet is before you even start negotiating with the seller, do 2 things first.
1) have seller sign an authorization to release mortgage, and permission to release any other info to you. Fax that to the bank.
2) have bank mail/ fax you a letter stating they will not accererate loan if you agree to make all the back payments. and that they will not charge any redicoulous assumtion fees in the process. In the event you can't make monthly payments, the bank can't touch you, because the loan is still in the sellers name.
As I understand it, this will avoid you having to go into an assumption agreement with the bank in which they qualify you , run you credit, and the loan is transfered in your name where you take full liability. Under an official assumtion agrerement, if you fall behind on your monthly payments, the bank can foreclose you, since the loan is now in your name.
bparker,
Glad to meet you.
Since you seem to have some understanding of Subject To deals, would you explain to me why I was able to do over 500+ deals and never assumed a loan or had the loan called by the lender?
Please be specific in your answer, because the way you explained how it works is unfamiliar to me.
John $Cash$ Locke
I would like to hear $Cash's$ take on this last post...
Who is going to notify the mortgage company of the Sub2 deal? My idea of a closing is a Purchase & Sale Agreement and a Warranty Deed executed at a McDonald's with the Seller. I will surely not be the one to call the lender... I will just send them their money on a timey monthly basis.... The only time the lender will ever hear from me is when my Tenant-Buyer purchases the property 12 months down the road.
StaceyWyatt,
I agree, I even sign the paperwork on the hood of my Chevy.
Who is going to call the lender?
Great post!
John $Cash$ Locke
bparker,
Did this happen to you on one of your sub2 deals or is your comment just in theory????
bparker,
Why would you notify the bank of making up of the back payments and taking over the loan? This would create a red flag for them. That would defeat the whole purpose of a "Subject-to". We do have the previous owner sign a "CYA" letter, but can it be challanged in court? YES. Would we lose? Maybe not(depends on the judge). Don't tell the bank and it will not be called.
Sire
GM everybody. This is my first post so bare with me. My take on the Sub2 way of getting a property is that you dont notify the bank of anything. It's none of their business and I'd like to keep it that way. As long as they get their money why should they care? The only reason they would care is if you didnt pay the loan as agreed. But then again, the bank doesnt make any money off this transaction because you never apply for a loan. Also, I thought this WAS a quite way to assume an unassumbale loan? You conduct all transactions in the Trust which keeps the banks eyes off what you are doing. The only time the bank would know anything is when YOU sell the propetry out of the trust. My question is what if the person you bought the property from files bankruptcy? I'm sure the state will search for any morgages or deeds and see the one you're seller has given to the bank in the clerk records. Your Trust is holding the title but the lein is still in the sellers name. What would happen in that case? Would the BK proceedings make the seller bring that property out of the Trust?
Kazor:
To address the "can I get sued" question. I would insert language, either in your contract, or by way of a sepate paper to be executed between you and the seller, whereby the parties agree that, in the event the underlying loan is called due, that the parties agree to cooperate to secure new financing on the property. I would add an indemnification clause whereby the parties would agree to indemnify and hold the other party harmless in the event the underlying loan is called due.
In regard to your analysis of what subject to investing, I believe you are confused beyond taking title subject to the existing financing and actually assuming the underlying loan obligation. Under the latter, you agree to become legally responsible to make the loan payments to the bank. With an assumption, both the seller, as the original promisee, and you, pursuant to the assumption, would be liable on the loan. Under subject to, the seller remains liable to make the payments under the terms of the loan (in the event of default) but you actually make the payments for them. You do not assume the legal responsibility of default.
Hope this helps. J
Hope this helps.