BiggerPockets

I have read that the best thing to do when taking over a loan " Subject To" , is to immediately inform the lender so that everything is out in the open up front. Three thoughts on this, and I'd like your input:

First, while I do agree with full disclosure, I wonder if this is asking for trouble by willingly firing up a red flag.

Second, I wonder if the lender would mind a new payer, especially in today's market. If the original borrower can't make their payments, at least there's a chance you can. Foreclosures are up, this may be the best time for " Subject To" buying.

Third, if your credit is good, wouldn't it be a good idea to tell the lender that, or allow them to check your credit if they're unsure of the transaction?

Thanks for your help on this!

Ryan

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I dug up this old post to see if others wanted to comment on it. What success have you had with informing the lender about subject-to purchases in today's environment? Do you just send a certified letter when you do this or do you use some other process?

I would definitely be interested to hear others experiences.

Hi, I'm sure that I have posted this on BP somewhere and have written articles on the subject elsewhere. I have long advocated informing the lender in all installment contracts, wraps and sub-2 transactions.

As John mentioned, a properly given notice will keep them from saying they didn't know but more importantly, after a period of time and if a formal objection is not made or notice to accelrate the loan is not made, that may be construed as acceptance of the deal!

Over a thousand transactions and never has a mortgage been called under the due on sale clause!

With the current conditions, it becomes less likely any lender will object.

The use of the due on sale clause arises out the interest rate risk for the lender. They may have a loan assumed at a lower than current market rates instead of having it paid off in a conventional sale, remaining on the hook at a lower rate. The average mortgage is paid off in about seven years and this is built in to the risk analysis of any portfolio.

Another way to avoid any complication is to kiss the note! Anyone can guarantee a mortgage and most any lender would be willing to allow anyone in addition to the borrower provide additional guarantes, unless it chanaged the initial underwriting aspects (for example, someone who has jusdgments, bank ruptcy, etc.) This may be difficult to do however with securitized notes in never-never land.

Then if you have guaranteed to note, your making a payment is no longer an issue.

Approaching any lender with disclosure can be an art, since the intitial reavction will be "you can't do that", but after you explain the details and their options, they will change their tune. Always disclose! Bill

The "they" in the second paragraph is the lender or servicer. The servicer is generally granted authority to adminster the loan, make demands, etc.

We have been talking a new process through with our attorney for months now and there are a ton of good questions to go over. One of the main points is the question about what happens if the seller is up against foreclosure. We have a tidy little letter that we send certified mail, read receipt requested to the servicer and 30 days later they object. The problem is that the seller goes to auction before that...so it seems problematic.

There is also the question of whether or not putting the lender on notice actually serves any tangible benefit. The lender should technically still retain the right to call the note on sale even if they are informed. Does anyone know of any case law on this subject?

It seems the right process kind of depends on the situation of the seller. If there is ample time to inform the lender and get consent then that seems like the prudent thing to do. Does the lender generally send you something in writing saying that things are okay?

If the seller is up against the gun it seems that disguising things may be the right course of action rather than goofing with the sevicer and/or the assumption department. The seller would just have to sign the standard acknowledgement paperwork which could recite the fact that we are not informing the lender due to time constraints.

Thoughts?

Steve, I'm going to find out your secrets here on how to locate these threads and post them! Very good.

The letter and strategy was fine Nick posted, IMO.

As to Bryan's post, I think he meant, return receipt requested, not read, you'll never know if it was read and that's not important.

As to when is the sub-2 appropriate, that is an issue. Likely a sub-2 is not going to be very successful after a notice of demand has been made to your seller. Your sub-2 deal has no bearing on the lenders ability to foreclose. Generally, a borrower can not encumber collateral (which is what a contract would do) after a notice of demand and intent to foreclose has been given. You sub-2 has no effect on the lender's right to foreclose. It's just another notice.

I'm speaking here of loans that are in compliance, not in default and where the seller is agreeable to selling in this manner.

A lender, I will bet money, you will not get a letter saying your deal is OK. But it's not required.

I did receive a letter saying that the transaction I had described was acknowledged but that the bank was not waiving any rights provided under their security agreement. All they acknowledged was that they were aware of the transaction and agreed to contact me in the event it became necessary. Since my disclosure provided an authorization for the bank to disclose loan information to me and allow me to make deposits to the seller's account/loan. I had tons of phone calls, but just one letter as I recall.

The only time I would advise doing a sub-2 (and no reason to use this startegy as other would be easier) would be after a notice of default has been made. In such a case, you don't really have time to sit back and make payments on a defaulted loan. Don't know why someone would think of using a sub-2 in a default situation.

If your strategy is to buy and hold for some time, more than say 90 days, give notice and disclose.

One other comment, as pointed out in the thread shown by Steve. Insurance. The seller and the buyer can be co-insureds, just like a husband and wife, but you don't have to be married to be a co-insured. Banks generally catch installment deals and wraps by the insured being changed on policies. A letter with your new binder can explain the change as pointed out. Many times, I allowed the tax receipts to be mailed to the seller, unless it was a loan servicer, since the seller needs to know that taxes were paid. The buyer can get a copy from the county or the seller, you can leave that issue alone in that respect. Good luck, Bill

Thanks for digging up that thread Steve.

I agree with Bill's comments about the bank not giving you an "acceptance" letter waiving their rights. It also appears that the poster in the other thread slips the ownership notice in with the insurance letter. This could arguably be "disguising" things too since that letter should make its way to a separate department.

I also agree with the comments on that thread claiming that sub-to should be a short to mid term acquisition strategy. In Austin this is a very popular strategy for a number of reasons. The motivation of many is to secure additional financing for portfolio properties that they later deleverage and carry with new financing.

To me it seems a bit silly to inform the lender if it doesn't really give you any protection. There is legal precedence that not informing the lender does not constitute fraud. I can understand wanting to be up front about everything, but the bank knows what is happening when the insurance policy is updated and the free world knows if you sell the property on a wrap note because the deed gets recorded. Assuming there is a balloon in the wrap note this is a short-term strategy.

There are frequently times when a deal only makes sense to me if I don't incur transaction costs and can carry using the seller's financing. Many of these purchases are near foreclosure, which happens rapidly in Texas. Consequently, I don't see informing the lender in these instance making a whole lot of sense.

I am really more concerned with nutso sellers claiming they were "duped" and hiring an attorney when their DTI takes a hit via a misinformed broker or a conservative lender. Even if they sign acknowledgments and are fully informed an attorney can make life uncomfortable, especially if the home is sold on a wrap note and you no longer own it!

Opinions?

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