Subject to - How much time allowance did lender give after due on sale called?

4 Replies

Experienced Sub2 investors/bankers: When the bank acted on the "due on sale" clause, how much time did you have to perform your exit strategy? What was it? Enough time to list it and sell? Paid off in cash? Would you take the penalty and use your retirement savings to pay off debt?

Worst case scenario, what happens if investor can't come up with the money?

Also, I was told third hand that once the real estate taxes come due, the bank sees the change of title and calls note due.  True through your experience?

How long do you carry a sub 2 deal?

Thank you


I have yet to have a lender call a loan due on my sub2 transactions.  I don't have an extensive portfolio of sub2's but do have a handful that I've held for over 3 years.  The mentor that taught me the sub2 strategy has done over 400 in his 30 year career and here's what his experience has been:

1) There is always a chance that a loan will be called due.  Likelihood is that less than 2% will ever be.  You just don't know what 2%.  That doesn't mean 2% of your sub2 portfolio, but 2% in general.  It's possible that Investor A has 5 properties w/sub2 financing and Investor B has 25 sub2 properties.  2% of the notes are called and within that 2% are all 5 of Investor A's and none of Investor B's properties.  You just never know.  Is that likely to happen...probably not, but you have to assume that going into the transaction.  If you can live with that and sleep at night, go ahead.

2) When a bank calls the note, your timeline will be at least 90 days, however every lender is different and you may be able to negotiate.  You may be able to negate the acceleration just by asking some questions as how they would like that rectified.  

3) If the note is accelerated, your exit strategy will depend on your equity position of the property to market value. If there is significant equity..i.e. Mortgage balance $100K, market value $150k, you should not have an issue either selling to another buyer OR refinancing it with another loan (institutional, private money or JV w/another investor).

If the property is at or above market value, you will need to work a little harder in finding a way to refinance (things you need to consider prior to taking on transaction like this).  Understand that you are responsible for someone else's credit.  This transaction usually takes place with sellers that don't have many options due to the value of their property or they can no longer afford to pay.  They opt for this route to keep their credit in tact and prevent SS or foreclosure on their record (again, take this into consideration when evaluating the deal and this strategy).  If you do not have an exit strategy then you run the risk of damaging your seller's credit along with your reputation as a "problem solver".

If you cannot perform on the call, the lender will foreclose.

Regarding taxes, I have had multiple sub2 props for over 3 years and have not had an issue.  

Term:  My personal goal is to have my sub2 props for the life of the mortgage or longer.  All my agreements specifically state to the seller that I am not obligated to cash the mortgage out at any point in time.  My sellers enter into our agreement with the understanding that this loan will go the duration of what's left on the loan.

Hope that helps. 

Agree 100% with Dan. I own several and have never had an issue with lien holder. I actually send them a POA and 3rd Party Authorization, give them a call to let them know that I'm an investor that will be handling all affairs with the property. I believe most banks are relieved when I take over payments as my payments are on auto draft and any back payments are caught up.

FYI- I have only dealt with big banks and no credit unions to date

@Dan Walters  provides great information.  Additionally, I wrote a blog about this subject about 3-weeks ago, which also provides links to the Garn-St Germain Act that governs the Due on Sale clause.  You can find the blog here...

Subject To Misinformation

The seller's credit will be damaged if the lender calls the note due and the one that did the subject2 will just move on to the next deal, unless they cash out the bank. I notice a few sellers here in Dallas that allow someone to do a subject2 will ask for tax returns, DOB, SSN, and fill out a complete application that they can pay the mortgage and if someone balks at filling an application out complete could be running a scam.

My 2cents,

Joe Gore

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