BiggerPockets

Let us know what the lawyers that said yes had to say about the deals.

Very curious to hear what they say, Ryan. I've spoken with a number of people (investors, not attorneys) about them, and to a person they said there is zero risk of getting the loans called. If lenders didn't have the huge glut of foreclosures, and interest rates where up significantly, things would be different. But as long as they're getting a payment, they have bigger fish to fry.
Jon

Subject-to. Completely legal as no law is being broken.

The DOS clause in the loan contact can be exercised by the lender. If they do not exercise it then no harm done.

You can send a certified letter to the lender letting them know. That way they have full knowledge and no deception is taking place.

Be prepared to pay off the loan if the loan is called. Even if you did not send a letter you still need to be able to do this with any subject-to.

The deal is mostly a work out for both the owner and the lender. The lender is not getting what they bargained for but it could be a lot better than a foreclosure. Hence many lenders are renegotiating loans or they are keeping quiet about subject-to deals. They want the payments to be made and are not suffering if that is happening.

John Corey

I've read everything I can get my hands on regarding this, and it's clear that Sub2 can be both completely legal and ethical.

From the standpoint of the seller, as long as (1) they understand how the process works and (2) they understand the potential risks involved (such as the buyer dropping the ball with payments), it's a great deal for both parties.

I say " can be" because I also know that many so-called " real estate investors" are indeed dropping the ball by trying to do Sub2 with virtually no money, no funds to fall back on if they need to handle the payments themselves. I spoke with one at my local REI group who exhibited virtually NO guilt, NO remorse for letting a seller go into foreclosure. These are the people who can and probably will cause damage to the efforts of those of us who are trying to do this correctly.

As with any business, many people try to run things on a shoestring when they should not. If you can't run a business properly, it's best not to start it in the first place. If you don't have the money to do it right, save up until you do.

The one ethical issue I'm trying to deal with is the relationship between myself and the lender. Virtually everything I've read on Sub2 involves fooling the lender via Land Trusts and LLC. If I have to fool anyone, this strategy won't be for me.

My goal is to do this the way John Corey mentions above - by officially alerting the lender immediately so that everything is on the table. My goal by meeting with attorneys is then to make sure all paperwork in the deal is appropriate and complete.

I'm looking forward to these meetings!

Ryan,

Thanks for the link to the other thread.

John Corey

John Corey's right. The lender can excercise the DOS if they want, there's nothing against 'the law'.

People that purchase a property sub2 with the sole intention of letting it go to foreclosure are pretty unethical.

" In a fraudulent transaction, the perpetrator may make millions of dollars, and the attorney will make $1000., but you will both wear the orange jumpsuit and serve the same amount of time.... "

Spoken like a true attorney.

I hardly believe last minute contract changes, double closings and sub2s will put you in prison. I wonder if the fact that he works for banks has anything to do with that. I would like someone to show me anyone who is currently, or has been in prison, for doing a sub2 or a straight forward double close with no fraud. Anyone.

The truth is, the attorney only stands to make that $1,000. So why would they risk anything or advise you to do anything out of the box? They won't. They can make that $1,000 from the office telling you not to do deals and bringing up all the worse case scenarios that could happen. Well, unlike attorneys, most RE investors don't get paid from sitting around NOT doing deals.

Good points Flipper.

I listened to a " Subject to" guru at a real estate investing club one time and I was amazed the guy was willing to stand up in front of 100 people and describe how he was breaking the law. The " Due on Sale" clause was the part that was getting him. Just about every mortgage has a " due on sale" clause requiring you to notify the lender at the time of sale. If someone knowingly (or unknowingly) fails to notify the lender they are setting themself up for potential litigation. If the buyer notifies the lender and they are willing to let the loan stand then I don't see any problems. I have a feeling as long term mortgage rates increase, most lenders will want to call these loans and relend the money at higher rates, though.

Just because a lawyer is willing to help you with a transaction, doesn't make the transaction legal. There are plenty of shady lawyers. It's up to investors to ultimately be responsible for our actions.

I guess it depends on what you mean by " breaking the law" . AFAIK, violating the due on sale clause in a contract is a civil matter. I'm no lawyer, but I don't think this is a criminal matter in any state. I don't think anyone can go to prison for violating a due on sale clause.

The " punishment" , and its really a penalty not a punishment, is to have the loan called due.

Perhaps James' lawyer is saying that by violating the due on sale clause you have committed fraud. Fraud is a criminal matter. That seems like a stretch, but again, I'm no lawyer.

Now, I have heard things proposed, like raising the price and getting cash back from the seller, that are explicitly disallowed. If you look at the blog James references, it appears the activity discussed all involve activites that are explicitly fraud:
Fitzgerald - inflated values on purchase to defraud lenders. I'm aware of at least three situations where this occurred in this area, including one I recently mentioned.
Leaf - mortgage broker lent money for downpayments and hid that from the lender.
Lincoln - false documents for borrowers income. Interesting to contract this with the you-tube video where the lending guidelines explicitly said not to ask for such documentation. Hmmm.
Ormandi - selling lots they didn't actually own.

I tried searching, but " subject to" turns up all the hits on " subject" and " to" .

Now, personally, I'm not comfortable with subject to transactions. And I don't deal with directly with distressed sellers. Like someone said, there are tons of REOs, even if its hard to get one at a good price. And fraud can be committed using subject to and double closes. But, I don't think its fair to say that subject to or a double close is in itself fraud.

As far as equity purchase and foreclosure consultant laws, I believe those vary a lot from state to state. I know ours are fairly harsh here in Colorado, and there are criminal penalties for violations. So, for example, I know if you were to use the standard Colorado Real Estate Board purchase contract to directly buy a house from someone after they had been served with the " Notice of Election and Demand" (NOD in most places) you would be in violation of the Colorado Foreclosure Protection Act, and would be subject to criminal penalties including prison. But this act does not forbid either double closings or subject to's, nor does it have the Maryland provision about returning 82% of any profits to the seller.