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.
This is awesome info Cam. Keep on providing us with this kind of info so we can become great real estate investors like you. Thanks so very much.
Peace
For every dollar the bank has in their vault or on record ( virtual money) the FDIC gives them $10 credit to loan out or invest in derivatives etc; and make more money for the bank. This is why the bank wants the money not the house and will take the money every time over the house if they have a choice so we are doing them a service by giving them what they want. “Its a win win win situation” for the bank, the home owner in default/keeps a foreclosure off their credit history and the investor.
Took a house sub2 one time, seller changed their mind, deeded it right back to them.
Thanks, Cam, for this subject to advise. I learned belatedly with a removal of a renter that the Cash-for-Key method works. Can this be used to remove the non-moving seller?
Absolutely!
I did a lot of Sub To deals during the meltdown in southeast Michigan in 2007-10. Never had one lender bat an eye lash. They are just happy to have a “performing” loan on their books again, and it frees up their capital to make other good loans (as someone mentioned above.) Right now, we are in the process of moving from Michigan to Minnesota, to be near my son and family. I found an owner in forbearance (about 6 months behind when we first talked, but about 8 months now). She agreed to request a Loan Modification from her lender, to get her loan current, and then my husband and I will take over the house Sub To this new .. lower interest!! .. loan. Divorce and income hits due to Covid led to both of them moving out in July. House was listed, but not selling to retail buyers, due to various minor repairs needed (which don’t bother us). This Load Mod will help her credit tremendously (she’s the only one on that mortgage), and it really helps us because we don’t have to sell our current primary home here in Michigan first, and cash out, before we can relocate to Minnesota by taking out a new mortgage there. Should be closing our Sub To deal in a few weeks, as soon as her modified loan’s terms are in place. Once we have moved in up there, likely in late December/early January, we can come back to finish up prepping this house, and then I’ll do “my investor thing” to get it sold. My favorite deals are Win-Win-Win.. Do not let that due on sale language deter you at all!!
This was one of the most useful things I’ve read about real estate investing. Thank you!
Thank you Cameron
Greatly appreciate the education.
The real problem back in 2008 crash was a lot of so called investors would take the deed subject to the existing mortgge rent out the house and keep the rent, AND NOT PAY THE MORTGAGE.,, THEY SHOULD BE GETTING OUT OF JAIL SOON.,
You’re spot on Steve. That was a big issue back in the day. What they did was referred to as equity skimming and they got what they deserved.
Thanks for your comment!
Cam
I have done over 500 sub2 deals over the past 22 years and never had one DOS issue. It just isn’t something we worry about.
Cameron Dunlap always dropping knowledge for our REWN Family!! Continued blessings to you and your family Cam!
Very good information Cameron Dunlap! Keep up the good work!
Cameron, keep up the good work.
Hi Cam thanks for ur information and stay blessed as always
Thank you, Cam, for making RE simplified to understand and know where the pitfalls are in purchasing homes in all manners of transactions.
How about this Land Trust stuff. Is anyone doing that?
Hi Cam, I want to know can you create a Subject to and then do a lease option? How would that work?
Absolutely!
Highly informative. Thank you
Yes, I got a letter on a subject-to deal for several reasons. Young military family going overseas, they owed too much, so we did a subject-to and I put a lease option buyer in the house on a 25 month lease, month 25 they were going to get financing and we would all move on. Month 16 she lost her job and quit paying. I couldn’t pay without her payment, the original owners couldn’t pay. And there we were. I did not get enough upfront to have the cushion, had not developed any hard money, didn’t move fast enough to remove her and was too kind (gullible). Plan to be wiser this time around.
Cam — can’t thank you enough for the heads up on a very important concern. We all want to do things in an above board and considerate manner on behalf of the seller’s circumstance and our own integrity. You set the standard for which I’m thankful.
Great info, making it easier to consider as an investment option and to create win-win strategies.
Thanks for the TIPS to be aware of regarding original owner or Record on the Deed/Mortgage.
I’ve done many, many Subject To sales, but entirely different from normal, and for a different reason… I do it to protect the property from being attacked.
Because there is a greater chance for the Seller/s to be sued by lawsuits, IRS, money judgments, etc., I use Land Trusts. (If Sellers would end up having a judgment on them, the property would not be attached because it is now owned by a Trust.)
One of the Sellers remains Trustee and I, or my entity, become Beneficiary. Then the Sellers give me a Second Mortgage and Promissory Note in exchange for the money used to pay for back payments, taxes, etc. (Also, the Sellers give me a Deed-in-Lieu of Foreclosure.)
I record three documents: the Warranty to Trustee Deed, Memorandum of Trust, and the second mortgage.
(When I did this in Florida, recording a Memorandum of Trust wasn’t necessary because there is a Florida Statute on Trusts; but Ohio and Kentucky there is not a statute.)
When I receive the documents from the Court House, I make a copy of the Trustee Deed and send it to the Seller’s insurance company instructing them to include the Trustee as an additional insured to the insurance policy.
If the Sellers do not repay the second mortgage with interest to me as written in an agreement (repaid in thirty or more days), then I record the Deed-in-lieu of Foreclosure and send a copy to the bank.
Note: And as of yet, I have never been repaid by the sellers; but I have always received confirmation and sometimes (in the old days) new payment coupons from different banks.
So concluding: I do not fear the banks; but I do fear having the property I take over being attacked in such a way I can not recover.
Totally new to real estate investing. From the article I understand that I would need to have separate insurance on “the subject to” property. Do we not take over the seller’s insurance and taxes too?
No. You need a new policy showing you and the bank as loss payees. Taxes are typically escrowed by the lender and prorated in the monthly payment, so that won’t change.
Hope this helps.
Cam